Technical Market Report

By: Mike Burk | Sat, Dec 18, 2004
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The good news is:
 • New lows remained minimal during the past week and declined on Thursday and Friday when prices also declined.
 • We are entering what is seasonally the strongest period of the year.

Through a market cycle (bottom to bottom) downside volume (DV) quickly dries up when the sellers are exhausted making it a good bottom indicator. The chart below shows the NASDAQ composite in red and a 4% trend (55 day EMA) of NASDAQ DV in brown. DV is on an inverted Y axis so decreasing DV moves the indicator upward while increasing DV moves the indicator downward. In the past two weeks DV has increased substantially without breaking the uptrend in prices. As we approach the holidays DV as well as overall volume should decrease as if sellers take care of their business before the holidays.

The chart below is an example of an ideal DV/Price pattern. It covers the period from June 1999 to June 2000. DV increased during the entire run up, peaking with the April 2000 bottom. There was a slightly lower price low in May that was unconfirmed by DV. If you look carefully you see there were sharp price advances during brief periods when DV decreased. Because of the approaching holidays I think we are likely to see one of those brief periods of sharply increasing prices and decreasing DV.

The 4 days prior to Christmas usually begin weak and end strong and are a little better for the small caps than the blue chips. In the past 16 years the Russell 2000 (R2K) has only been down once during the period and the average advance has been nearly 2%. Returns during the 4th year of the presidential cycle have been less robust. The R2K has been up in every 4th year averaging a modest 0.36% while the S&P 500 (SPX) has been down 3 out of the 4 recent 4th years.

4 days before Christmas.
The number following the % change represents the day of the week
1=Monday, 5=Friday etc.
The number following the year is the year of the presidential cycle.
MDD = Maximum Draw Down of the trade

R2K Day4 Day3 Day2 Day1 Totals
1988-4 -0.03% 2 -0.20% 3 0.21% 4 0.26% 5 0.24%
1989-1 -0.68% 2 0.12% 3 0.56% 4 0.77% 5 0.77%
1990-2 0.47% 3 0.12% 4 0.09% 5 -0.30% 1 0.39%
1991-3 -0.66% 4 -0.07% 5 1.04% 1 0.93% 2 1.23%
1992-4 -0.26% 1 -0.09% 2 0.21% 3 0.46% 4 0.33%
1993-1 -0.13% 1 -0.56% 2 -0.05% 3 0.38% 4 -0.37%
1994-2 0.07% 2 1.12% 3 0.12% 4 0.46% 5 1.78%
1995-3 0.75% 2 0.92% 3 0.60% 4 0.53% 5 2.80%
1996-4 0.86% 4 0.17% 5 -0.36% 1 0.13% 2 0.79%
1997-1 -0.08% 5 0.68% 1 -0.20% 2 -0.23% 3 0.17%
1998-2 1.11% 1 -0.40% 2 1.14% 3 0.19% 4 2.04%
1999-3 0.21% 1 1.84% 2 0.45% 3 0.94% 4 3.44%
2000-4 -0.96% 2 -3.27% 3 0.73% 4 3.57% 5 0.07%
2001-1 -0.70% 3 -1.66% 4 2.10% 5 0.37% 1 0.10%
2002-2 -0.14% 4 0.90% 5 0.74% 1 -0.41% 2 1.09%
2003-3 0.00% 5 0.46% 1 1.03% 2 -0.48% 3 1.00%
Averages -0.01% 0.01% 0.53% 0.47% 1.98%
% Winners 38% 56% 81% 75% 94%
MDD 12/20/2000 4.20% -- 12/20/2001 2.35% -- 12/22/1993 .74%
 
Presidential year 4
R2K Day4 Day3 Day2 Day1 Totals
1988-4 -0.03% 2 -0.20% 3 0.21% 4 0.26% 5 0.24%
1992-4 -0.26% 1 -0.09% 2 0.21% 3 0.46% 4 0.33%
1996-4 0.86% 4 0.17% 5 -0.36% 1 0.13% 2 0.79%
2000-4 -0.96% 2 -3.27% 3 0.73% 4 3.57% 5 0.07%
Averages -0.10% -0.85% 0.20% 1.10% 0.36%
Winners 25% 25% 75% 100% 100%
MDD 12/20/2000 4.20% -- 12/23/1996 .36% -- 12/22/1992 .35%
 
SPX Day4 Day3 Day2 Day1 Totals
1988-4 -0.52% 2 -0.03% 3 -0.18% 4 0.36% 5 -0.37%
1989-1 -0.36% 2 0.11% 3 0.57% 4 0.77% 5 1.08%
1990-2 0.05% 3 -0.02% 4 0.49% 5 -0.56% 1 -0.04%
1991-3 -0.25% 4 1.18% 5 2.53% 1 0.63% 2 4.09%
1992-4 -0.13% 1 -0.09% 2 -0.29% 3 0.17% 4 -0.34%
1993-1 -0.11% 1 -0.12% 2 0.43% 3 0.01% 4 0.22%
1994-2 -0.18% 2 0.55% 3 0.01% 4 0.03% 5 0.42%
1995-3 0.84% 2 -0.98% 3 0.75% 4 0.24% 5 0.86%
1996-4 1.94% 4 0.42% 5 -0.26% 1 0.55% 2 2.65%
1997-1 -0.89% 5 0.73% 1 -1.53% 2 -0.68% 3 -2.37%
1998-2 1.25% 1 0.06% 2 2.07% 3 -0.18% 4 3.20%
1999-3 -0.21% 1 1.08% 2 0.19% 3 1.55% 4 2.61%
2000-4 -1.30% 2 -3.13% 3 0.80% 4 2.44% 5 -1.18%
2001-1 0.58% 3 -0.84% 4 0.44% 5 -0.02% 1 0.16%
2002-2 -0.77% 4 1.30% 5 0.18% 1 -0.55% 2 0.16%
2003-3 -0.05% 5 0.39% 1 0.28% 2 -0.18% 3 0.45%
Averages -0.01% 0.04% 0.41% 0.29% 1.45%
% Winners 31% 56% 75% 63% 69%
MDD 12/20/2000 4.38% -- 12/24/1997 2.37% -- 12/20/1995 .98%
 
Presidential Year 4
SPX Day4 Day3 Day2 Day1 Totals
1988-4 -0.52% 2 -0.03% 3 -0.18% 4 0.36% 5 -0.37%
1992-4 -0.13% 1 -0.09% 2 -0.29% 3 0.17% 4 -0.34%
1996-4 1.94% 4 0.42% 5 -0.26% 1 0.55% 2 2.65%
2000-4 -1.30% 2 -3.13% 3 0.80% 4 2.44% 5 -1.18%
Averages 0.00% -0.71% 0.02% 0.88% 0.19%
% Winners 25% 25% 25% 100% 25%
MDD 12/20/2000 4.38% -- 12/22/1988 .73% -- 12/23/1992 .51%

We are approaching the normally strong pre-Christmas period with a very strong market. The recent high level of DV indicates accelerated selling has been unable to take prices down.

I expect the major indices to be higher on Thursday December 23 than they were on Friday December 17.

The market rose last week in spite of negative technical and seasonal conditions making my negative forecast a miss.


 

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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