Technical Market Report

By: Mike Burk | Sat, Jan 28, 2006
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The good news is:
 • The small and mid cap indices all closed at new all time highs on Friday.
 • There were 278 NASDAQ new highs on Friday, the highest number recorded since 12/1/2004.

Short term

The chart below covers the period from late last April with dashed vertical lines on the 1st trading day of each month. The NASDAQ composite (OTC) is shown in red and Accutrack (AT), a FastTrack relative strength indicator is shown in black. AT is comparing the strength of the Russell 2000 (R2K) and the S&P 500 (SPX). When AT is moving upward the R2K is outperforming the SPX. AT is near its high for the past year, from these levels we would expect a lead time of at least a few days before a market turn.

The NASDAQ new high indicator ( OTC NH) is a 10% trend (19 day EMA) of NASDAQ new highs. The chart below covers the period from late April through last Friday. The OTC is shown in red and OTC NH is shown in green.

The indicator fell a little on Monday when the index was for all practical purposes flat then headed sharply upward the rest of the week, including Wednesday which was a down day.

As of Friday the value of the indicator was 158 so more than 158 new highs will move the indicator upward while less than 158 will move the indicator downward. Pay attention when the indicator moves in a direction opposite the index.

Intermediate term

At market bottoms both new lows and downside volume dry up quickly making bottoms relatively easy to identify.

Market tops usually drag out for a while with new lows and downside volume increasing as the indices rise.

New lows have remained low since the October low, however, as the indices are at or near new multiyear highs, downside volume is holding at levels close to where is was last October.

The chart below shows the OTC in red and a 4% trend (55 day EMA) of NASDAQ downside volume (OTC DV) in blue. OTC DV is plotted on an inverted Y axis so increasing OTC DV moves the indicator downward (UP is good).

The chart below shows the OTC and OTC DV during the period from mid August 1999 to May 2000. The dashed vertical red line indicates the 1st trading of 2000.

OTC DV steadily increased as the index also rose to its high in March 2000 then the index collapsed while OTC DV continued to rise. Only after the index had collapsed did OTC DV begin to diminish.

It is a stretch to call the two charts above similar, but the sustained high levels of OTC DV last week during a 2% - 4% rise in the major indices bears watching.

Seasonality

Next week is made up of the last 2 trading days of January and the First 3 trading days of February during the 2ndyear of the Presidential Cycle.

This is a strong period, up about 2/3 of the time.

Last 2 days of previous January and first 3 days of February.
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.
MDD = Maximum Draw Down

OTC Presidential Year 2
  Day2 Day1 Day1 Day2 Day3 Totals
1966-2 0.02% 5 0.27% 1 -0.64% 2 -0.81% 3 0.36% 4 -0.80%
1970-2 -1.14% 4 -1.94% 5 -1.85% 1 -0.29% 2 0.67% 3 -4.55%
1974-2 0.65% 3 -0.25% 4 -0.82% 5 -1.34% 1 -0.46% 2 -2.23%
1978-2 0.35% 1 -0.13% 2 0.69% 3 0.39% 4 0.27% 5 1.58%
1982-2 1.44% 4 1.17% 5 -0.83% 1 0.34% 2 -0.02% 3 2.10%
Avg 0.26% -0.18% -0.69% -0.34% 0.16% -0.78%
 
1986-2 -0.12% 4 0.43% 5 0.50% 1 0.12% 2 0.29% 3 1.23%
1990-2 -1.77% 2 1.24% 3 0.47% 4 1.07% 5 0.60% 1 1.60%
1994-2 0.46% 5 0.49% 1 -0.40% 2 0.29% 3 -0.22% 4 0.62%
1998-2 0.53% 4 0.00% 5 2.00% 1 0.81% 2 0.85% 3 4.19%
2002-2 1.08% 3 1.08% 4 -1.18% 5 -2.00% 1 -0.92% 2 -1.94%
Avg 0.04% 0.65% 0.28% 0.06% 0.12% 1.14%
 
Summary for OTC Presidential Year 2 1966 - 2002
Averages 0.15% 0.24% -0.21% -0.14% 0.14% 0.18%
% Winners 70% 60% 40% 60% 60% 60%
MDD 2/3/1970 5.12% -- 2/5/2002 4.04% -- 2/5/1974 2.85%
 
Summary for OTC all years 1963 - 2005
Averages 0.13% 0.30% 0.17% 0.02% 0.18% 0.79%
% Winners 58% 66% 65% 70% 62% 67%
MDD 2/3/1970 5.12% -- 2/5/2001 4.24% -- 2/5/2002 4.04%
 
SPX Presidential Year 2
  Day2 Day1 Day1 Day2 Day3 Totals
1930-2 0.54% 4 1.42% 5 0.61% 6 -0.83% 1 1.19% 2 2.93%
1934-2 1.25% 2 -1.41% 3 2.00% 4 -0.09% 5 1.14% 6 2.89%
1938-2 -0.38% 6 1.71% 1 1.87% 2 -1.38% 3 -2.00% 4 -0.17%
1942-2 -0.67% 5 -0.45% 6 0.34% 1 0.68% 2 0.79% 3 0.68%
 
1946-2 -0.59% 3 0.05% 4 0.38% 5 0.38% 6 -0.48% 1 -0.26%
1950-2 0.71% 1 0.18% 2 0.00% 3 1.06% 4 0.35% 5 2.29%
1954-2 0.04% 4 0.23% 5 -0.35% 1 -0.27% 2 0.35% 3 0.00%
1958-2 -0.48% 4 0.05% 5 0.82% 1 1.00% 2 -0.64% 3 0.75%
1962-2 0.40% 2 0.98% 3 0.61% 4 0.79% 5 0.10% 1 2.88%
Avg 0.02% 0.30% 0.29% 0.59% -0.06% 1.13%
 
1966-2 -0.38% 5 -0.46% 1 -0.78% 2 0.40% 3 0.13% 4 -1.09%
1970-2 -1.27% 4 -0.78% 5 0.86% 1 1.19% 2 -0.61% 3 -0.61%
1974-2 1.09% 3 -0.50% 4 -1.29% 5 -2.00% 1 -0.31% 2 -3.02%
1978-2 0.86% 1 -0.10% 2 0.76% 3 0.22% 4 -0.57% 5 1.18%
1982-2 2.00% 4 1.24% 5 -2.00% 1 0.20% 2 -1.30% 3 0.14%
Avg 0.46% -0.12% -0.49% 0.00% -0.53% -0.68%
 
1986-2 -0.46% 4 1.17% 5 1.03% 1 -0.55% 2 0.08% 3 1.28%
1990-2 -0.68% 2 1.89% 3 -0.09% 4 0.65% 5 0.28% 1 2.05%
1994-2 0.35% 5 0.61% 1 -0.41% 2 0.50% 3 -0.27% 4 0.77%
1998-2 0.82% 4 -0.53% 5 2.00% 1 0.47% 2 0.09% 3 2.85%
2002-2 1.17% 3 1.49% 4 -0.71% 5 -2.00% 1 -0.40% 2 -0.44%
Avg 0.24% 0.93% 0.36% -0.19% -0.04% 1.30%
 
SPX summary for Presidential year 2 1930 - 2002
Averages 0.23% 0.36% 0.30% 0.02% -0.11% 0.79%
% Winners 58% 63% 58% 63% 53% 68%
MDD 2/5/1974 4.06% -- 2/3/1938 3.35% -- 2/5/2002 3.09%
 
SPX summary for all years 1928 - 2005
Averages 0.15% 0.29% 0.13% 0.08% -0.08% 0.56%
% Winners 62% 65% 62% 60% 49% 67%
MDD 2/3/1933 4.61% -- 2/5/1974 4.06% -- 2/5/1979 3.41%

February
The charts below show the performance during an average February over all years and an average February during the 2nd year of the Presidential Cycle. The charts assume an average month of 21 trading days and are made by averaging each of the first 11 and last 10 trading days. In a short month like February some of the days in the middle are counted twice. To reduce the effect of outliers, any day with a move greater than 2% is reduced to 2% for the calculations.

OTC 1963 - 2005

SPX 1928 - 2005

Usually when charts show an average over a long period, such as the one above, volatility is reduced. Year 2 for the SPX in the chart above is made up of 19 samples for each day so the high volatility shown in the chart is surprising.

Conclusion

Except for stubbornly high downside volume the market appears to have little resistance to the upside.

I expect the major indices to be higher on Friday February 3 than they were on Friday January 27.

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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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