Technical Market Report

By: Mike Burk | Sat, Jul 12, 2008
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The good news is:
• The conditions are ripe for a washout which would be a setup for a tradable rally.

Short Term

I use momentum indicators of price and breadth to find a short term rhythm in the market. These have all failed recently as the market has gone to rarely seen oversold levels.

The two charts below show short term indicators that have catastrophically failed over the past week or two. Looking at these indicators you would think we had a big rally last week and are likely to decline next week.

The first chart covers the past 6 months showing the S&P 500 in red and an indicator that has been constructed by applying a momentum indicator to an oscillator (also a form of momentum indicator) of NYSE downside volume subtracted from upside volume, in green.

The next chart is similar to the one above except it covers the past 100 trading days showing the NASDAQ composite (OTC) in blue and the indicator (shown in brown) inputs are NASDAQ new highs and new lows.

Intermediate Term

There were 897 new lows on the NYSE Friday, the highest number since the January 22 low. The NASDAQ recorded 359 new lows on Friday, down from 447 on Monday. Both numbers (of new lows) are large enough to imply, at least, a retest of current levels if not lower lows. A rule of thumb for a tradable rally is: New low indicators must have been rising for at least 5 consecutive days before a sustainable rally is likely. Current levels of the new low indicators are 414 for the NYSE and 269 for the NASDAQ.

The chart below is an update from last week, it covers the past year showing the NASDAQ composite (OTC) in blue and a 10% trend (19 day EMA) of NASDAQ new lows (OTC NL) in black. OTC NL has been plotted on an inverted Y axis so decreasing new lows move the indicator upward (up is good).

Money Supply (M2)

The chart below was provided by Gordon Harms. Since the mid March spike, money supply growth has fallen to the low end of its range of the past several years.

Seasonality

Next week is the week prior to the 3rd Friday of July during the 4th year of the Presidential Cycle.

The tables show the daily return on a percentage basis for the week prior to the 3rd Friday of July during the 4th year of the Presidential Cycle. OTC data covers the period from 1963 - 2007 and SPX data from 1953 - 2007. There are summaries for both the 4th year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been omitted.

By all measures the coming week has been one of the worst of the year.

Report for the week before the 3rd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday through 3rd Friday.

OTC Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1964-4 0.34% -0.15% -0.10% 0.12% -0.05% 0.17%
 
1968-4 -0.07% -1.00% 0.00% -0.84% -1.41% -3.32%
1972-4 -0.76% -0.67% 0.18% -0.53% 0.42% -1.35%
1976-4 0.50% 0.03% 0.51% 0.09% -0.13% 1.00%
1980-4 0.29% -0.40% 0.02% 0.06% -0.17% -0.21%
1984-4 -0.42% -0.08% -0.54% -0.58% -0.66% -2.28%
Avg -0.09% -0.42% 0.04% -0.36% -0.39% -1.23%
 
1988-4 -0.05% -0.16% 0.01% 0.28% -0.02% 0.07%
1992-4 -1.09% 0.77% -0.84% 0.24% 0.07% -0.85%
1996-4 -3.92% -0.63% 3.15% 2.13% -1.09% -0.37%
2000-4 0.67% -2.28% -2.91% 3.18% -2.15% -3.49%
2004-4 -0.48% -0.27% -0.87% -0.11% -1.55% -3.28%
Avg -0.98% -0.51% -0.29% 1.14% -0.95% -1.59%
 
OTC summary for Presidential Year 4 1964 - 2004
Avg -0.45% -0.44% -0.14% 0.37% -0.61% -1.26%
Win% 36% 18% 50% 64% 18% 27%
 
OTC summary for all years 1963 - 2007
Avg -0.11% -0.22% -0.04% 0.04% -0.13% -0.44%
Win% 57% 33% 45% 59% 49% 42%
 
SPX Presidential Year 4
Year Mon Tue Wed Thur Fri Totals
1956-4 0.86% 0.35% -0.02% 0.04% 0.06% 1.29%
1960-4 -0.89% -1.09% -0.27% 0.04% -0.12% -2.33%
1964-4 -0.32% -0.24% -0.02% -0.05% -0.02% -0.66%
 
1968-4 -1.12% -0.12% 0.00% -1.28% 0.41% -2.12%
1972-4 -0.86% -0.05% 0.29% -0.31% 0.80% -0.12%
1976-4 0.88% -0.22% 0.26% -0.71% -0.49% -0.28%
1980-4 0.39% -0.26% -0.21% -0.11% -0.83% -1.03%
1984-4 0.48% 0.51% -0.64% -0.68% -0.55% -0.88%
Avg -0.05% -0.03% -0.07% -0.62% -0.13% -0.89%
 
1988-4 0.20% -1.00% 0.55% 0.35% 0.66% 0.76%
1992-4 -0.45% 0.00% -0.68% 0.28% -0.12% -0.97%
1996-4 -2.53% -0.23% 0.91% 1.50% -0.75% -1.11%
2000-4 0.03% -1.11% -0.78% 0.92% -1.03% -1.97%
2004-4 0.14% 0.07% -0.33% -0.43% -0.48% -1.03%
Avg -0.52% -0.45% -0.07% 0.52% -0.34% -0.86%
 
SPX summary for Presidential Year 4 1956 - 2004
Avg -0.25% -0.26% -0.08% -0.03% -0.19% -0.80%
Win% 54% 31% 33% 46% 31% 15%
 
SPX summary for all years 1953 - 2007
Avg -0.12% -0.30% 0.01% -0.01% -0.07% -0.48%
Win% 47% 28% 50% 57% 49% 38%

Conclusion

Predicting crashes or washouts is a loser's game because there are so few examples to draw on for comparison. The market is already at oversold extremes, money supply is not growing and seasonally next week has been one of the worst weeks of the year. Give me a washout.

I expect the major indices to be lower on Friday July 17 than they were on Friday July 11.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html. If it is not for you, reply with REMOVE in the subject line.

Last week the blue chips were down and the secondaries were up so I am calling last weeks positive forecast a tie.

Thank you,

 


 

Author: Mike Burk

Mike Burk

Mike Burk independently publishes a weekly newsletter on the stock market from a technical perspective.

Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron's and ISI price books. The views expressed are provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.

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