Technical Market Report
The good news is:
• Many of the major indices including the S&P 500 (SPX), Russell 3000, Russell 2000 (R2K), S&P mid cap, Valueline and Wilshire 5000 hit multiyear highs last week. All time highs were attained for the mid and small cap indices.
For the week, the highest number of new highs on both the NYSE and NASDAQ were recorded on Thursday. Most of the indices were down on Friday while new lows on both the NYSE and NASDAQ also declined on Friday.
The new high indicator is a 10% trend (19 day EMA) of new highs. The chart below shows the NASDAQ composite (OTC) and the NASDAQ new high indicator (OTC NH) in green. OTC NH hit a new cycle high on Friday.
The OTC NH is a good short term trend indicator and the indicator rising on Friday, a day when the index was down, is a positive.
Summation indices (SI) are running totals of oscillator values. The chart below shows the OTC in red along with SI's calculated from oscillators generated from NASDAQ advances - declines, new highs - new lows and upside - downside volume. SI's are good intermediate term indicators and they are all heading upward.
The next two charts show the Russell 2000 (R2K) in red, a 6% trend of upside volume of its component issues (UV) in green and a 6% trend of downside volume of its component issues (DV) in brown. DV is plotted on an inverted Y axis so that increasing DV moves the indicator downward while decreasing DV moves the indicator upward (up is always good).
From the recent rally's beginning at the end of April both UV and DV began decreasing sharply and continued decreasing until early - mid July, and for the past two weeks both have been increasing.
This means that the rally from early May to mid July has been caused by a lack of sellers, not aggressive buying.
I had to go back to late 1999 to find a similar pattern.
The chart below covers the period from late July 1999 to early May 2000, the 1st of January is indicated by a vertical dashed red line. The first trading day of each month is indicated by a grey vertical dashed line.
The indicators crossed in late November and the index peaked in early March about 3 weeks after both UV and DV began increasing. In the chart above UV and DV began increasing about 2 weeks ago. August could be interesting.
The yellow line in the next chart shows the average performance of the OTC through the month of August from 1963 - 2004, the white line shows average performance of the OTC through the month of August during the 1st year of the presidential cycle over the same period. During the 1st year of the presidential cycle the OTC has, on average, peaked on the 5th trading day of the month and closed the month with a loss while the pattern of all years combined has been the opposite.
The maroon line in the next chart shows the average performance of the SPX through the month of August from 1928 - 2004. The white line shows the average performance of the SPX through the month of August during the 1st year of the presidential cycle over the same period. The patterns are similar to the chart above.
The market internals have strengthened over the past week and next week has a strong seasonal bias.
I expect the major indices to be higher on Friday August 5 than they were on Friday July 29.
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