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Technical Market Report

The good news is:
 • The recent highs in all of the major indices were confirmed byeverything that matters implying higher prices ahead.

The chart below is an update of the one I used the past two weeks showing the NASDAQ composite in red and an indicator constructed by subtracting momentum of NASDAQ new lows from momentum of new highs in purple. Vertical dashed lines are drawn at the first trading day of each month and the period representing September has been labeled.

The indicator is short term and nearly binary in its representation of market strength moving sharply upward or downward at turning points.

After a 4-5 week run up from mid August the indicator fell in mid September for about a week as the market corrected. The fall was arrested as the market entered the seasonally strong end of month period. A similar pattern developed in mid November after a 4 week run up, again the indicators weakness was arrested as the market entered the seasonally strong holiday and end of month period.

Now, in a pattern similar to early October, the indicator has turned downward. The indicator turned because while the index was rising NASDAQ new highs fell from 316 on Wednesday to 219 on Thursday and 152 on Friday. New lows also fell from 14 on Wednesday to 12 on Thursday and 11 on Friday. The decrease in new highs suggests trouble ahead while the insignificant number of new lows tells us the trouble should not be severe. The NASDAQ composite's decline from its early October high to its mid October low was 3.5%.

The chart below covers the period from mid October to Friday December 3 and shows the NASDAQ composite and the NASDAQ new high indicator (a 10% trend of NASDAQ new highs). The indicator does a nice job of smoothing out the wiggles in prices and, as you might expect, with new highs declining by half in the past three days, the indicator has turned downward.

For small caps, December has been, on average, the strongest month of the year. For the past 16 years, the Russell 2000 (R2K) has been up an average of 3.1% in December and it has been up in all but two of those years. January has been second with an average gain of 1.9%.

Typically, December starts and finishes strong with weakness in the middle. Next week includes the 4th through the 8th trading days of December. As you can see in the table below, the first three trading days of December have been strong, but performance has fallen off beginning with the 4th trading day.

The number following the % change represents the day of the week 1=Monday, 5=Friday etc.
The number following the year is the year of the presidential cycle.
The days are the trading day of the month.

Russell 2000
Year 1 2 3 4 5 6 7 8
1988-4 0.4% 4 0.1% 5 0.5% 1 0.3% 2 0.0% 3 -0.2% 4 0.0% 5 -0.2% 1
1989-1 0.2% 5 0.0% 1 -0.1% 2 0.3% 3 -0.2% 4 0.1% 5 -0.4% 1 0.0% 2
1990-2 0.5% 1 0.5% 2 1.5% 3 0.3% 4 -0.1% 5 -0.2% 1 -0.6% 2 0.5% 3
1991-3 0.2% 1 0.4% 2 0.2% 3 -0.3% 4 0.2% 5 -0.5% 1 -0.5% 2 -0.6% 3
1992-4 0.0% 2 0.2% 3 0.3% 4 0.0% 5 1.2% 1 0.2% 2 -0.4% 3 -0.7% 4
1993-1 0.9% 3 0.1% 4 0.4% 5 0.0% 1 0.0% 2 0.1% 3 -0.4% 4 -0.2% 5
1994-2 -0.9% 4 0.3% 5 0.0% 1 -0.4% 2 -0.8% 3 -1.7% 4 -0.4% 5 0.1% 1
1995-3 0.4% 5 0.9% 1 0.2% 2 -0.1% 3 -0.5% 4 0.2% 5 0.2% 1 -0.2% 2
1996-4 0.3% 1 0.7% 2 0.1% 3 0.3% 4 -1.0% 5 1.4% 1 0.2% 2 -1.0% 3
1997-1 1.0% 1 -0.4% 2 0.3% 3 0.3% 4 0.7% 5 0.9% 1 -0.9% 2 -1.2% 3
1998-2 0.2% 2 -0.3% 3 -0.6% 4 0.9% 5 0.7% 1 0.1% 2 0.1% 3 -1.4% 4
1999-3 -0.1% 3 1.5% 4 0.9% 5 0.3% 1 0.0% 2 0.7% 3 -0.8% 4 0.4% 5
2000-4 2.4% 5 -1.4% 1 4.6% 2 -1.6% 3 -0.5% 4 3.9% 5 1.7% 1 -1.9% 2
2001-1 -0.8% 1 2.4% 2 2.5% 3 0.6% 4 -0.2% 5 -1.5% 1 0.1% 2 0.1% 3
2002-2 0.5% 1 -1.9% 2 -0.8% 3 -0.8% 4 0.6% 5 -2.6% 1 1.9% 2 0.1% 3
2003-3 1.5% 1 -0.2% 2 -1.5% 3 -0.2% 4 -0.9% 5 0.7% 1 -1.6% 2 -1.1% 3
2004-4 1.6% 3 -0.2% 4 0.0% 5          
Avg .49% .16% .49% -.02% -.05% .10% -.12% -.45%
Win% 76% 65% 71% 60% 44% 63% 40% 38%

The market is overbought and the short term indicators are deteriorating as it leaves a seasonally strong period.

I expect the major indices to be lower on Friday December 10 than they were on Friday December 3.

Gordon Harms produces a power point for our local FastTrack users group. You can get that file at: http://www.guaranteed-profits.com

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