Monday, June 29, 2009

Indicator Update for June 29th




Last week's indicator review concluded that we had lost upside momentum and were likely trading in a range defined by May's lows and June's highs. After dipping toward May lows early in the week, we bounced higher later in the week and ended on Friday pretty close to the middle of that broad range. Accordingly, we didn't see dramatic trending behavior among the S&P 500 sectors that I follow; prices remain relatively close to levels recorded in early May.

Recall that the Demand/Supply Index (DSI) is a proprietary index of the number of stocks closing above and below the volatility envelopes surrounding their short-term moving averages. The Cumulative DSI (top chart) is a running total of daily DSI levels, adjusted to create a zero mean. During rallies, the Cumulative DSI will stay above zero for prolonged periods, as more stocks close with strong momentum than weak momentum. This past week we dipped below zero before bouncing back into positive territory; this often occurs during the early phase of market corrections. It continues the pattern of weakening momentum noted last week.

Similar weakness was seen in the new high/low data (middle chart), as we saw new 65-day highs move slightly below new lows early in the weak before bouncing higher. The new highs peaked in early June and have been moving lower since; indeed, much of this past week we saw 20-day lows outnumber 20 day highs by handy margins. We need to keep 20-day highs above lows to sustain the late week bounce; a reversal back to a surplus of new lows would suggest further correction.

Finally, we can see from the Decision Point chart that the advance-decline line specific to S&P 500 stocks (bottom chart) has shown only a weak bounce and is well off its highs after dipping last week below May lows. A drop in the A/D line below last week's lows would suggest a more serious correction to the bull move that started in March.

In all, we appear to continue in a broad trading range between May's lows and June's highs. The continued weakness among the indicators suggests that we may see further correction ahead; should we move to further weakness in the DSI and hold last week's lows (and level of stocks making 20-day lows), I would be an aggressive buyer. A break of last week's lows accompanied by further indicator weakening would be indicative of a more substantial market correction that I would be reluctant to fade.

Indicators, as usual, will be updated each day before the market open via Twitter; you can follow tweets here or read the latest five posts on the blog page under "Twitter Trader."
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1 comment:

OKL said...

I would further add that most of the macro markets are in their respective ranges as well.

However, there is a fair bit of reports coming out this week both in Europe and US, whether that might change sentiment is another issue.

With the decline in volatility (VIX), there hasn't been a >3% move either to the upside or downside for ~2-3mths (depending on whether you use trading days or calendar days); I tend to think that an occurrence of such a move, combined with the corroboration of the macro markets and market internals, could determine a trending break away from the 20/50/200sma range.

Until then, I would expect the price action to resemble tennis, table tennis or badminton- bouncing within a range, with neither camp gaining sufficient foothold.

Just my 2cents.