Technical Market Report
The good news is:
• The current period of weakness should produce good long side entry points soon.
The new low indicator, a 10% trend (19 day EMA) of new lows is the best indicator for identifying bottoms. New lows dry up very quickly after peaking near a price low making the indicator easy to read. In the charts below the new low indicator is plotted on an inverted Y axis so increasing new lows push the indicator downward while decreasing new lows move the indicator upward (up is good down is bad). The charts are scaled so that minimum and maximum values of the indicator or index, for the period showing, go to the top and bottom of the chart.
The first chart shows the NYSE new low indicator and the S&P 500 (SPX). The indicator is at its lowest point since March of 2003 and falling.
I have recently written about the problem of contamination of NYSE data by the large number of Bond ETF's traded on the exchange. The chart below is similar to the one above, but the indicator is calculated with NASDAQ new lows and the index is the NASDAQ composite. The patterns vary a little, but both indicators are at their lowest level in over a year and still heading downward.
The indicators can be ignored when they are near the top of the screen because there are very few new lows. Long standing rules of thumb as to the trigger levels for concern are several consecutive days of more than 40 new lows on the NYSE and 70 on the NASDAQ. April 19 was the last day there were less than 40 new lows on the NYSE. The 70 level has only been exceeded twice on the NASDAQ with 77 new lows on April 30 and 90 last Friday.
The chart below shows the same indicators and period as those above, except the index is the Russell 2000 (R2K) and new lows are calculated on the component issues of the R2K for 6 weeks rather than 52 weeks as reported by the exchanges. It is not clear on the chart as shown that the indicator hit a new low for the past year on Friday.
All of the charts above cast doubt on the significance of the recent March low as a major low. One can minimize the significance of NYSE data and argue that the NASDAQ has yet to reach critical mass, but we are close.
The chart below shows the same indicators as those above, but the period is one year, the index is the SPX and new lows are calculated on the component issues of the SPX for 6 weeks rather than 52 weeks as reported by the exchanges. This chart still supports the idea that the recent March low was significant because the new low indicator has a long way to go before reaching the March low. If this decline ends soon, the relative strength shown suggests a transition of leadership from the secondaries to the blue chips. If this decline does not end soon the chart will merely be showing how the follow the secondaries.
The current period is dangerous. Seasonally the end of April beginning of May period is one of the strongest and that seasonal strength failed to arrest the decline. Most of the new low indicators hit one year lows on Friday and all of them are heading downward. There were 706 new lows on the NYSE on Friday, the last time that number was exceeded was July 24, 2002 when there were 917.
When reading the new low indicators it is prudent to wait until there have been 5 consecutive up days to avoid being whipsawed. The value of the NYSE new low indicator on Friday was 190, any number of NYSE new lows greater than 190 will keep that indicator moving downward. The value of the NASDAQ new low indicator on Friday was 42, any number of NASDAQ new lows greater than 42 will keep that indicator moving downward.
I expect the major indices will be lower on Friday May 14 than they were on Friday May 7.
Last weeks forecast was another miss. The pattern of seasonal strength ended Thursday and the market followed that pattern pretty closely, but, Friday's losses wiped out all of the gains made earlier in the week.