Technical Market Report

By: Mike Burk | Sun, Aug 28, 2005
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The good news is:
 •  There has not been a significant build up of new lows.

There has also been no volume. Typically volume increases during market rallies and sharp declines.

The chart below covers the past year. There are grey dashed vertical lines drawn on the 1st trading day of each month and red on the 1st trading day of the year. The NASDAQ composite (OTC) is drawn in red and a 6% trend (33 day EMA) of total NASDAQ volume is drawn in black.

Volume peaked during the rally in mid-December and again during the sharp decline in January. Volume has been trending downward since late January continuing to decline through the late April to early August rally that took the OTC to new 4 year highs.

A rally is overdue.

With no buildup of new lows, the decline over the past month should be viewed as a pullback in the context of a larger up move. These pullbacks rarely last more than a month.

The next chart is an update of one I used last week. It shows the OTC in red and momentum of the ratio of NASDAQ advancing issues / (advancing + declining issues) in purple. The indicator the indicator turned up last week in spite of the downward move in prices. Momentum indicators are oscillators. If the rate of increase or decrease remains the same the indicator will return to 0. In this case the indicator turned up because the rate of decline has slowed.

The secondaries lead both up and down.

The following chart is another update from last week showing the Russell 2000 (R2K) in red and the percentage of the R2K component issues that are above their respective 50 day EMA's in green. This indicator gave a leading indication of the late April bottom and the early August top. Nothing about it suggests a bottom near.

The following chart is similar to the one above except it shows the S&P 500 (SPX) in red and the indicator is calculated from the component issues of the SPX. Although the R2K is 5.8% off its early August high while the SPX is only 3.2% off its high, 10% more of the issues in the R2K are above their respective 50 day EMA's than the SPX. This indicates the recent weakness has been confined to the larger capitalization issues including the larger cap issues in the R2K. This is a positive.

About 30 years ago Norman Fosbeck did a study covering the previous 50 years. In the study he found the first and last few trading days of each month were unusually positive.

The following tables show returns for the last 3 trading days of August and the 1st 2 trading days of September during the 1st year of the presidential cycle. There are summaries for both the 1st year of the presidential cycle and all years combined. NASDAQ data covers the period from 1963 - 2004 while SPX data covers the period from 1928 - 2004.

There is a positive bias over all periods with both indices, however, during the 1st year of the Presidential cycle the bias is more positive than the overall averages.

Last 3 days of August and first 2 days of September.
The number following the year represents its position in the presidential cycle.
The number following the daily return represents the day of the week;
1 = Monday, 2 = Tuesday etc.

OTC Presidential Year 1
  Day3 Day2 Day1 Day1 Day2 Totals
1965-1 0.20% 5 0.26% 1 0.20% 2 0.22% 3 0.27% 4 1.14%
1969-1 -0.59% 3 0.06% 4 0.97% 5 0.32% 2 0.09% 3 0.84%
1973-1 0.78% 3 0.19% 4 0.85% 5 0.60% 2 0.50% 3 2.92%
1977-1 0.48% 1 -0.26% 2 -0.01% 3 0.30% 4 0.43% 5 0.94%
1981-1 -0.50% 4 0.37% 5 -0.91% 1 -0.30% 2 0.11% 3 -1.22%
Avg 0.07% 0.12% 0.22% 0.23% 0.28% 0.92%
 
1985-1 0.34% 3 0.11% 4 0.13% 5 -0.39% 2 -0.33% 3 -0.13%
1989-1 -0.13% 2 0.36% 3 0.23% 4 0.43% 5 0.02% 2 0.90%
1993-1 0.37% 5 0.45% 1 0.74% 2 0.45% 3 0.34% 4 2.34%
1997-1 0.26% 3 -0.89% 4 0.38% 5 1.94% 2 0.01% 3 1.70%
2001-1 -1.17% 3 -2.79% 4 0.77% 5 -1.92% 2 -0.66% 3 -5.78%
Avg -0.07% -0.55% 0.45% 0.10% -0.13% -0.19%
 
OTC summary for Presidential year 1 1965 - 2001
Averages 0.00% -0.21% 0.33% 0.16% 0.08% 0.36%
% Winners 60% 70% 80% 70% 80% 70%
MDD 9/5/2001 5.68% -- 9/1/1981 1.33% -- 8/28/1997 .89%
 
OTC summary for all years 1963 - 2004
Averages -0.16% -0.18% 0.32% -0.02% 0.13% 0.09%
% Winners 55% 62% 78% 61% 69% 60%
MDD 8/31/1998 9.13% -- 9/3/2002 6.23% -- 9/5/2001 5.68%
 
SPX Presidential Year 1
Day3 Day2 Day1 Day1 Day2 Totals
1929-1 -0.19% 3 0.97% 4 1.34% 5 0.35% 2 -0.31% 3 2.15%
1933-1 -0.53% 2 -0.89% 3 -0.09% 4 1.26% 5 -3.47% 2 -3.73%
1937-1 0.19% 6 1.32% 1 -0.50% 2 -2.68% 3 -1.60% 4 -3.27%
1941-1 0.29% 4 -0.10% 5 0.19% 6 0.39% 2 -0.68% 3 0.10%
 
1945-1 -0.13% 3 0.33% 4 1.04% 5 0.00% 2 0.13% 3 1.37%
1949-1 -1.05% 1 0.60% 2 0.07% 3 0.59% 4 -0.13% 5 0.07%
1953-1 -0.29% 4 -0.21% 5 -1.77% 1 0.43% 2 0.60% 3 -1.25%
1957-1 0.07% 3 -0.40% 4 1.71% 5 0.49% 2 -0.86% 3 1.00%
1961-1 -0.22% 2 0.38% 3 0.38% 4 0.18% 5 -0.34% 2 0.39%
Avg -0.33% 0.14% 0.29% 0.34% -0.12% 0.32%
 
1965-1 0.07% 5 0.01% 1 -0.05% 2 0.00% 3 0.55% 4 0.59%
1969-1 0.20% 3 0.42% 4 0.65% 5 0.03% 2 -0.59% 3 0.72%
1973-1 0.98% 3 -0.14% 4 0.36% 5 0.25% 2 0.12% 3 1.57%
1977-1 0.90% 1 -0.56% 2 0.40% 3 0.06% 4 0.64% 5 1.45%
1981-1 -1.16% 4 0.46% 5 -1.04% 1 0.19% 2 0.38% 3 -1.17%
Avg 0.20% 0.04% 0.07% 0.11% 0.22% 0.63%
 
1985-1 0.39% 3 0.05% 4 -0.16% 5 -0.38% 2 -0.29% 3 -0.39%
1989-1 -0.64% 2 0.23% 3 0.23% 4 0.65% 5 -0.33% 2 0.14%
1993-1 -0.11% 5 0.30% 1 0.36% 2 -0.09% 3 -0.40% 4 0.06%
1997-1 0.07% 3 -1.10% 4 -0.46% 5 3.13% 2 0.03% 3 1.67%
2001-1 -1.11% 3 -1.70% 4 0.40% 5 -0.06% 2 -0.11% 3 -2.57%
Avg -0.28% -0.44% 0.07% 0.65% -0.22% -0.22%
 
SPX summary for Presidential year 1 1929 - 2001
Averages -0.12% 0.00% 0.16% 0.25% -0.35% -0.06%
% Winners 47% 58% 63% 68% 37% 68%
MDD 9/2/1937 4.71% -- 9/5/1933 3.73% -- 8/30/2001 2.80%
 
SPX summary for all years 1928 - 2004
Averages -0.11% -0.08% 0.20% 0.01% 0.16% 0.17%
% Winners 58% 51% 63% 66% 57% 62%
MDD 8/31/1998 7.15% -- 9/3/2002 6.08% -- 9/4/1974 4.80%

There is still no indication of a bottom, but the market is very oversold and seasonally next week has a positive bias.

I expect the major indices to be higher on Friday September 2 than they were on Friday August 26.

Last weeks positive forecast looking for a countertrend rally from an oversold low was a miss.

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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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