Technical Market Report

By: Mike Burk | Sun, Oct 23, 2005
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The good news is:
 • The end of the current decline is in sight.

Short term

The NASDAQ new low indicator (OTC NL) is a 10% trend (19 day EMA) of NASDAQ new lows. OTC NL is plotted on an inverted Y axis so that when new lows are increasing the indicator moves downward and when new lows are decreasing the indicator moves upward (up is good). OTC NL is the best indicator I know of for identifying market bottoms. On a daily basis, OTC NL often gives false positives so it is prudent to wait until the indicator has been moving upward for 5 consecutive days before assuming a change in trend.

In the chart below the NASDAQ composite (OTC) is shown in red and OTC NL in blue. After moving modestly upward for a few days, OTC NL declined on Wednesday then resumed a modest upward move Thursday (which was a down day) and Friday. The value of the indicator is 81 (the same as last Friday) so any number of NASDAQ new lows greater than 81 will move the indicator downward and any number less than 81 will move the indicator upward.

Intermediate term

The next two charts show the Russell 2000 (R2K) in red and the percentage of the component issues of the R2K that are above their 50 day EMA in green; dashed vertical lines are drawn on the 1st trading day of each month. Horizontal dashed lines are drawn at 25%, 50% and 75%. On October 12 the percentage of issues above their 50 day EMA fell to a low of 17% and is currently at 30%. In the past, every time the indicator has dropped below the 25% level, the index has been at or near an intermediate term low.

In April the indicator hit its low in the middle of the month and the index hit its low about 2 weeks later. If we have a similar pattern, the index low could occur any time next week.

The next chart is similar to the one above except it covers the past 5 years. Dashed vertical red lines are drawn on the 1st trading day of each year.

You can see how every excursion of the indicator below the 25% level has marked a low for the intermediate term.

Summation indices (SI) are running totals of oscillator values.

The chart below shows the OTC in red, OTC AD SI calculated from NASDAQ advancing issues - declining issues, OTC HL SI calculated from NASDAQ new highs - new lows and OTC UD SI calculated from NASDAQ upside - downside volume. SI's are good intermediate term indicators and two out of three are still moving downward.

The chart below shows momentum of the oscillators used to calculate the SI's for the previous chart. The chart covers the past 3 months. For the past 2 months there has been a rhythmic pattern of about 1.5 weeks up followed by 1.5 weeks down. If the pattern continues, we should be near the top of the current move.

Seasonality

Since the mid 1980's options expiration has often been blamed for unusual market behavior. Options expire on the 3rd Friday of the month which was last Friday. The tables below show how the market has behaved during the week following the 3rd Friday of October during the 1st year of the Presidential Cycle. There are summaries for the 1st year of the Presidential Cycle and for all years combined. OTC data covers the period from 1963 - 2004 and S&P 500 (SPX) data covers the period from 1928 - 2004. This week during the 1st year of the Presidential cycle has been better than the average of all years.

The number following the year is the position in the presidential cycle. Daily returns from Monday to Friday after options expiration.

OTC Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1965-1 0.41% 0.13% -0.15% 0.29% 0.16% 0.85%
1969-1 1.07% 0.34% 0.73% 2.26% 0.86% 5.26%
1973-1 -0.85% -0.43% 0.29% 0.16% 0.43% -0.40%
1977-1 -0.66% -1.08% 0.03% 0.22% 0.43% -1.06%
1981-1 -0.25% 0.77% 0.60% 0.03% -0.27% 0.88%
1985-1 -0.23% 0.29% 0.27% 0.44% -0.38% 0.39%
Avg -0.18% -0.02% 0.38% 0.62% 0.21% 1.01%
 
1989-1 -0.73% -1.18% 0.26% -1.02% -1.18% -3.86%
1993-1 -0.57% -1.81% -0.06% 0.39% 0.18% -1.87%
1997-1 1.12% 1.78% -0.43% -2.15% -1.22% -0.91%
2001-1 2.20% -0.21% 1.59% 2.54% -0.37% 5.75%
Avg 0.50% -0.36% 0.34% -0.06% -0.65% -0.22%
 
Summary for OTC Presidential year 1 1965 - 2001
Avg 0.15% -0.14% 0.31% 0.31% -0.13% 0.50%
Win% 40% 50% 70% 80% 50% 50%
 
Summary for OTC all years 1963 - 2004
Avg 0.01% -0.25% 0.26% -0.14% -0.12% -0.24%
Win% 38% 40% 61% 48% 52% 45%
 
SPX Presidential Year 1
Year Mon Tue Wed Thur Fri Totals
1929-1 -1.00% 1.95% -2.00% -3.20% 0.00% -4.25%
1933-1 2.00% 3.99% 2.67% -1.97% 0.00% 6.68%
1937-1 -2.00% 3.16% 2.00% 2.01% 0.00% 5.17%
1941-1 0.00% 0.93% -0.41% 0.10% 0.00% 0.62%
1945-1 -0.79% 0.12% 1.65% 1.32% -0.06% 2.24%
Avg -0.45% 2.03% 0.78% -0.35% -0.06% 2.09%
 
1949-1 0.06% 0.50% 0.69% 0.56% 0.00% 1.82%
1953-1 0.08% 0.04% 0.08% 0.45% 0.21% 0.87%
1957-1 -2.93% -0.43% 4.49% -0.05% -0.29% 0.79%
1961-1 -0.61% -0.12% 0.53% 0.18% -0.18% -0.20%
1965-1 0.33% 0.13% -0.02% 0.17% 0.04% 0.66%
Avg -0.61% 0.02% 1.15% 0.26% -0.06% 0.78%
 
1969-1 0.21% 0.77% 0.65% -0.38% 0.68% 1.92%
1973-1 -0.96% 0.54% 0.47% 0.21% 0.80% 1.06%
1977-1 -0.75% -0.69% 1.21% 0.26% 0.29% 0.33%
1981-1 -0.18% 1.09% -0.15% -0.38% -0.87% -0.49%
1985-1 -0.04% 0.58% 0.56% -0.31% -0.52% 0.26%
Avg -0.34% 0.46% 0.55% -0.12% 0.08% 0.62%
 
1989-1 -0.67% -0.33% -0.35% -1.33% -0.85% -3.53%
1993-1 -0.22% -0.48% -0.03% -0.15% -0.45% -1.33%
1997-1 1.21% 1.75% -0.39% -1.84% -0.95% -0.22%
2001-1 1.53% -0.47% 0.04% 1.37% 0.41% 2.88%
Avg 0.46% 0.12% -0.18% -0.49% -0.46% -0.55%
 
SPX summrary for Presidential year 1 1929 - 2001
Avg -0.26% 0.69% 0.61% -0.16% -0.12% 0.80%
Win% 39% 68% 63% 53% 43% 68%
 
SPX summary for all years 1928 - 2004
Avg 0.05% 0.13% 0.22% -0.29% -0.02% 0.09%
Win% 51% 53% 60% 39% 45% 49%

Conclusion

There is evidence of a bottom; however, the severity of the recent decline and the behavior of the short term indicators suggest there could be one more dip before the market heads sharply upward.

I expect the major indices to be lower on Friday October 28 than they were on Friday October 21.

The major indices were mixed last week so I am calling last weeks positive forecast a tie.

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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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