Wednesday, April 09, 2008

The following article was originally published at The Agile Trader on April 9, 2008.

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Dear Speculators,

The Dynamic Trading System remains on its sell signals for both the SPX and the NDX at the open this morning.

Stock futures have traded in a wide range since the US stock market closed yesterday, with the SPX futures up as high as 1377 and down as low as 1362. They're trading down a couple of points right now at 1368.50.

The MBA Mortgage Applications Survey printed a 5.4% rise last week. The index remains roughly in the lower part of the range in which it has mainly lived for the past 3-4 years, though there have been brief and wild fluctuations.

Oil and Gas Inventories will print at 10:30am Wall Street time today. With oil at $108/barrel, the commodity is testing the top of its recent range, as well as its all-time high.

SPX: The SPX fell about 7 points yesterday, but has not fallen through any important support levels. Neither has it broken up through the top of the range in which it has been trading for the past 5 sessions. Both the shallow trendline near 1375 and horizontal resistance near 1400 continue to loom overhead (red lines). And the index continues to work on the "wedge" formation (dotted black lines). This kind of wedge upwardly canted wedge tends to resolve to the downside, as the relative shallowness of the supply line (upper limit of the wedge) usually represents diminishing enthusiasm for buying at higher levels. However, the 5 very small, low-volume candles that we've seen over the past week "sound like" a very quiet, tame argument between bulls and bears right now.

DTS NYSE Short-Term Oscillator: This short-term measure of the NYSE's internal buy/sell pressure remains on its short-term sell signal, falling from a very overbought condition. As you can see on this chart (yellow highlights) these kinds of downturns on the oscillator from very overbought conditions tend to be correlated with short-term decline phases on the SPX.

DTS NYSE Mid-Term Oscillator: This midterm measure of the NYSE's internal buy/sell pressure is also turning down from an overbought condition, and is likely to regress toward the zero line.

NYSE New High Percent Line: (5-dma of new highs divided by the sum of new highs plus new lows) New highs contracted yesterday from 87 to 37. The indicator is now overbought (above 80%). In a strong trend, we'll see this indicator ride above 80% for a protracted period. In a trading-range market, we'll see this indicator drop down from an overbought condition. So, with the SPX challenging resistance, we're about to find out what kind of market we're in going forward. I'm still looking for a print above 100 as a key indicator that the market wants to continue higher. Failure of a 100+ print on new highs would suggest that a trading range is in place.

NDX: The NDX dropped back below 1850, though by less than 2 points at the close yesterday. Volume remained light, however, and no important support levels have been broken to the downside.

DTS Nasdaq Short-Term Oscillator: This short-term measure of the NASDAQ's internal buy/sell pressure remains on a short-term sell signal, falling from a severely overbought condition.

DTS Nasdaq Mid-Term Oscillator: This midterm measure of the NASDAQ's internal buy/sell pressure is falling from a modestly overbought condition back down toward its zero (neutral) line.

Nasdaq New High Percent Line: (5-dma of new highs divided by the sum of new highs plus new lows) Breadth of leadership continues to lag on the Nasdaq. Only 18 new highs printed yesterday on this index. And this indicator continues to lag its NYSE counterpart. So, while the cross from a severely oversold condition (<5%) up and over 20% is bullish, so far all it means is that the bottom has stopped falling out of the index. There has, as yet, been on broad leadership in Tech. Risk Appetite in the New Economy has not (so far?) returned to the stock market.

It will be interesting to see how the Dow Transportation Index responds to its 5-day "soul kiss" of 5000 over the past 5 trading days in light of the downward guidance given last night by UPS, a weighty member of the Dow Transportation. UPS guided down about $0.06 for the quarter to $0.86-0.87. The CFO added that meeting the new estimate would be tough if current trends continue.

The Transports had broken the neckline of a Head & Shoulders Bottom, and has been testing 5000 from below. A break of 5000 would project targets at least 500 points (10%) higher.

Failure here at 5000 would project a test back down to 4750.

The SOX is already engaged in a test down to the broken downtrend line.

This re-test is extremely important. If the index bounces off the broken trendline and generates some buy signals, then the odds greatly increase of a rally up to the 400-425 area. But if that broken trendline cannot contain the selling, then the potential exists for a re-test of the recent lows near 330, and a possible break of support at that level, which could kick off further selling.

If the Trannies and the SOX start failing support levels, then the prospects for the broad market's recovery would worsen considerably.

The VIX and the SPX continue to move inversely to one another, as they are wont to do.

Short-term sell signals have developed on both our oscillators as the SPX peels away from its expanding upper Bollinger Band. And the converse is true of the VIX, which is drifting away from its declining lower Bollinger Band.

The window of opportunity remains open for the bears to jump through, but so far they have not mustered the requisite conviction to sustain an attack. With volume as low as it has been (in the range of 20-30% below average), it's not so much that the bulls have been vigorously defending the breach, but more that the bears are kind of milling around outside and peering through the window while they loiter and stub out their cigarettes on the sidewalk.

The extremely low volatility with low volume is not sustainable. A break one way or the other will happen soon.

Best regards and good trading!