The good news is:
• The small and mid cap indices hit new all time highs early lastweek.
Short term
The chart below covers the period from late last April with dashed vertical lines on the 1st trading day of each month. The NASDAQ composite (OTC) is shown in red and Accutrack (AT), a FastTrack relative strength indicator is shown in black. AT is comparing the strength of the Russell 2000 (R2K) and the S&P 500 (SPX). When AT is moving upward the R2K is outperforming the SPX. Last Thursday AT hit its highest level since September 2003. From these high levels prices usually carry a little higher over the next few weeks. AT turned down on Friday.
The NASDAQ new high indicator ( OTC NH) is a 10% trend (19 day EMA) of NASDAQ new highs. The chart below covers the period from early August through last Friday. The OTC is shown in red and OTC NH is shown in green.
The indicator rose through Wednesday then fell Thursday and Friday.
The numbers deteriorated from a high of 205 new highs on Monday to a low of 97 on Friday (The lowest since January 18).
As of Friday the value of the indicator was 161 so more than 161 new highs will move the indicator upward while less than 161 will move the indicator downward.
Intermediate term
The chart below covers the last year and a half showing the OTC in red and a 4% trend (55 day EMA) of NASDAQ downside volume (OTC DV) in blue. Grey dashed vertical lines are drawn on the 1st trading day of each month the lines are drawn in red on the 1st trading day of the year. OTC DV is plotted on an inverted Y axis so increasing OTC DV moves the indicator downward (UP is good). Usually OTC DV diminishes during rallies and increases during declines. OTC DV did not decline during the rally in the last half of January. There was a similar pattern in early December of 2004.
Looking at volume components over longer periods can be misleading because total volume might be different changing the relationships with other volume components.
The chart below covers the same period as the above chart and shows a 6% trend (33 day EMA) of total NASDAQ volume.
The current pattern and early December 2004 patterns are similar. There was a dip in the last half of December which is common after which both total volume and downside volume increased. If the current pattern follows the similar one in December 2004, we should be very near the top of this cycle.
The next chart covers the same period as the previous two. It shows momentum of downside volume in blue.
The indicator usually moves in the same direction as prices, it continued to fall during the recent rally (also similar to early December 2004), however it is at its lowest level in several years so, short term, a rally is likely.
Seasonality
The 4th through 9th trading days of February during the 2nd year of the Presidential cycle are strong. Tuesday - Thursday have historically been the strongest three days of the month.
Conclusion
Persistently high downside volume implies the top of this cycle is near. The recent high levels of new highs and low levels of new lows as well as relative strength of the secondaries over the blue chips suggest there is still a little left on the upside.
I expect the major indices to be higher on Friday February 10 than they were on Friday February 3.
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Last weeks positive forecast based on the momentum of the late January rally was a miss.
Gordon Harms produces a Power Point for the meetings of our local market timing group. You can get that at: Gordon Harms PPT.
