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Technical Market Report

The good news is:
 • A bottom appears to be forming so risk should be limited to levelsnear the October lows.

Short term

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows. OTC NL is plotted on an inverted Y axis so that when new lows are increasing the indicator moves downward and when new lows are decreasing the indicator moves upward (up is good). OTC NL is the best indicator I know of for identifying market bottoms. On a daily basis, OTC NL often gives false positives so it is prudent to wait until the indicator has been moving upward for 5 consecutive days before assuming a change in trend.

In the chart below the NASDAQ composite (OTC) is shown in red and OTC NL in blue vertical dashed lines are drawn at the 1st trading day of each month.

This indicator was encouraging during the first part of last week when it was moving sharply upward, but it turned downward on Thursday and continued moving downward on Friday in spite of a rally in prices.

The next chart shows the Russell 2000 (R2K) in red and an indicator that is a 20% trend (9 day EMA) of the percentage of the component issues of the R2K making new lows subtracted from those making new highs. New highs and new lows were calculated over the trailing 6 weeks rather than 52 weeks as reported by the exchanges. The indicator has been moving up sharply since early October, but is still below the 0 line (more new lows than new highs).

Like new lows, downside volume diminishes rapidly after a bottom has been reached.

The chart below shows the OTC and a downside volume indicator (OTC DV) which is a 4% trend (55 day EMA) of NASDAQ downside volume plotted on an inverted Y axis.

OTC DV has not yet begun to move sharply upward suggesting there is likely to be another retest of the recent lows.

Intermediate term

Summation indices (SI) are running totals of oscillator values.

The chart below shows the OTC in red, OTC AD SI calculated from NASDAQ advancing issues - declining issues, OTC HL SI calculated from NASDAQ new highs - new lows and OTC UD SI calculated from NASDAQ upside - downside volume. The direction of SI's make good intermediate term indicators and they are flat.

The chart below shows momentum of the oscillators used to calculate the SI's for the previous chart. The chart covers the past 3 months. For the past 2 months there has been a rhythmic pattern of about 1.5 weeks up followed by 1.5 weeks down. The downturn of these indicators appears to have been momentarily arrested, similar to the pattern we saw in early September.

Seasonality

The tables below show the daily performance during the 1st year of the Presidential Cycle for the last trading day of October and the first 4 trading days of November of the OTC and S&P 500 (SPX). OTC data covers the period from 1963 - 2004 and SPX data goes from 1928 - 2004. There are summaries for the 1st year of the Presidential Cycle and for all years combined.

The last trading day of October and the first 4 trading days of November are some of the strongest days of the year. This period during the 1st year of the Presidential Cycle has not been quite as strong as the average for all years, still, for the OTC the average return since 1965 has been nearly 1.5%.

Last 1 day of October and first 4 days of November.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 1
  Day1 Day1 Day2 Day3 Day4 Totals
1965-1 0.55% 5 0.29% 1 0.36% 3 0.22% 4 0.29% 5 1.71%
1969-1 0.79% 5 0.08% 1 -0.18% 2 0.11% 3 0.62% 4 1.42%
1973-1 -0.42% 3 -0.50% 4 -0.63% 5 -1.66% 1 -0.77% 2 -3.98%
1977-1 0.03% 1 -0.80% 2 -0.24% 3 -0.02% 4 0.75% 5 -0.28%
1981-1 1.12% 5 1.03% 1 0.78% 2 0.48% 3 0.15% 4 3.55%
Avg 0.41% 0.02% 0.02% -0.17% 0.20% 0.48%
 
1985-1 0.10% 4 0.54% 5 0.04% 1 0.35% 2 0.50% 3 1.52%
1989-1 0.94% 2 0.22% 3 -0.77% 4 -0.04% 5 -1.09% 1 -0.73%
1993-1 0.75% 5 0.58% 1 0.24% 2 -1.62% 3 -2.03% 4 -2.08%
1997-1 1.48% 5 2.28% 1 0.07% 2 0.37% 3 -0.85% 4 3.36%
2001-1 1.37% 3 3.32% 4 -0.03% 5 2.74% 1 2.31% 2 9.71%
Avg 0.93% 1.39% -0.09% 0.36% -0.23% 2.36%
 
OTC summary for Presidential year 1 1965 - 2001
Averages 0.67% 0.70% -0.04% 0.09% -0.01% 1.42%
% Winners 90% 80% 50% 60% 60% 60%
MDD 11/6/1973 3.92% -- 11/4/1993 3.61% -- 11/6/1989 1.89%
 
OTC summary for all years 1963 - 2004
Averages 0.54% 0.42% 0.13% 0.38% 0.16% 1.62%
% Winners 69% 69% 50% 71% 58% 69%
MDD 11/6/1973 3.92% -- 11/4/1993 3.61% -- 11/6/1967 2.58%
 
SPX Presidential Year 1
  Day1 Day1 Day2 Day3 Day4 Totals
1929-1 5.05% 4 -5.26% 1 -9.92% 3 3.69% 4 -0.89% 5 -7.34%
1933-1 -0.88% 2 1.79% 3 1.10% 4 3.47% 5 -0.31% 6 5.15%
1937-1 0.08% 6 -2.27% 1 -4.64% 3 -0.52% 4 0.00% 5 -7.34%
1941-1 -1.25% 5 0.42% 6 0.52% 1 0.73% 3 -0.83% 4 -0.40%
 
1945-1 1.65% 3 1.32% 4 -0.06% 5 -0.06% 6 0.53% 1 3.39%
1949-1 -0.56% 1 1.00% 2 0.80% 3 -0.24% 4 -0.49% 5 0.51%
1953-1 -0.16% 5 0.49% 1 -0.61% 3 0.53% 4 -0.12% 5 0.13%
1957-1 0.10% 4 -1.51% 5 -0.17% 1 0.15% 3 0.59% 4 -0.84%
1961-1 0.29% 2 0.16% 3 0.55% 4 0.52% 5 0.78% 1 2.30%
Avg 0.26% 0.29% 0.10% 0.18% 0.26% 1.10%
 
1965-1 0.23% 5 -0.21% 1 0.09% 3 0.16% 4 -0.10% 5 0.17%
1969-1 0.32% 5 -0.09% 1 0.06% 2 0.44% 3 0.03% 4 0.76%
1973-1 -0.95% 3 -0.55% 4 -0.58% 5 -1.45% 1 -0.53% 2 -4.06%
1977-1 -0.29% 1 -1.07% 2 -0.70% 3 0.06% 4 0.90% 5 -1.11%
1981-1 2.38% 5 1.90% 1 0.48% 2 -0.05% 3 -0.96% 4 3.75%
Avg 0.34% -0.01% -0.13% -0.17% -0.13% -0.10%
 
1985-1 -0.13% 4 0.90% 5 -0.15% 1 0.59% 2 0.20% 3 1.41%
1989-1 1.58% 2 0.25% 3 -0.80% 4 -0.25% 5 -1.48% 1 -0.71%
1993-1 0.02% 5 0.27% 1 -0.14% 2 -1.16% 3 -1.19% 4 -2.20%
1997-1 1.21% 5 2.66% 1 0.19% 2 0.21% 3 -0.50% 4 3.77%
2001-1 0.00% 3 2.29% 4 0.29% 5 1.44% 1 1.45% 2 5.47%
Avg 0.54% 1.28% -0.12% 0.17% -0.31% 1.55%
 
SPX summary for Presidential year 1 1929 - 2001
Averages 0.46% 0.13% -0.72% 0.43% -0.15% 0.15%
% Winners 58% 63% 47% 63% 37% 58%
MDD 11/6/1929 14.66% -- 11/4/1937 7.28% -- 11/6/1973 4.00%
 
SPX summary for all years 1928 - 2004
Averages 0.26% 0.31% -0.11% 0.34% 0.03% 0.84%
% Winners 57% 65% 55% 68% 51% 70%
MDD 11/6/1929 14.66% -- 11/5/1948 7.60% -- 11/3/1932 7.43%

November

The chart below shows the average daily return of the OTC for all years since 1963 in yellow and the average daily return during the 1st year of the Presidential Cycle in white. November is usually a pretty good month, but not during the 1st year of the Presidential Cycle.

The next chart is similar to the one above except the index is the SPX.

All years are shown in grey and the 1st year of the Presidential Cycle is white.

Conclusion

The evidence of a bottom continues to build, however, the characteristics that we look for at bottoms (rapidly diminishing new lows and downside volume) have not materialized. Seasonally next week is very strong so a final retest of the October lows is likely to be postponed for about a week.

I expect the major indices to be higher on Friday November 4 than they were on Friday October 28.

There was a lot of movement in both directions last week, but in the end, all of the major indices were up for the week making my negative forecast a miss.

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