Technical Market Report

By: Mike Burk | Sat, Mar 11, 2006
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The good news is:
 • There has been no significant build up of new lows.

The Dow Jones Industrial Average (DJIA) hit a multi year high on February 22 and, as of Friday's close is only 0.5% off that high.

The S&P 500 hit a multi year high on February 27 and it is currently 1% off that high.

The NASDAQ composite (OTC) hit a multi year high in early January and, as of Friday's close is 3% off that high.

The Russell 2000 (R2K) hit an all time high last week is currently 2.2% off its high.

Last week the secondaries underperformed the blue chips. That is indicative of a weakening market and likely a developing cyclical top.

Short term

The first chart covers the period from early June with dashed vertical lines on the 1st trading day of each month.

The indicator, in green, is calculated by subtracting momentum of downside volume from momentum of upside volume and the OTC is shown in red.

I have drawn a line at the level of the indicator at Thursday's close which is about as low as it has gotten in the past 9 months.

Measured by this indicator, the market is quite oversold and likely to rally, at least briefly from here.

The next chart covers the period from last June through last Friday.

The OTC is in red and AT (a FastTrack relative strength indicator) is shown in black. The indicator shows the relative strength of the R2K to the SPX. Then the R2K is stronger than the SPX the indicator moves upward (the secondaries are outperforming the blue chips - good).

The indicator is falling sharply with a pattern similar to early last August.

Intermediate term

Summation indices (SI) are running totals of oscillator values. When the oscillator is above 0 the SI rises and when it is below 0 the SI falls. Direction, not level is where these indicators are most valuable.

The chart below covers the period from October through last Friday showing the OTC in red and SI's calculated from NASDAQ advancing - declining issues, new highs - new lows and upside - downside volume.

The SI's have all turned sharply downward.

The next chart shows the OTC in red and momentum of NASDAQ downside volume on an inverted Y axis in blue, it covers the period from June through last Friday.

This indicator is moving sharply downward.

Seasonality
Options and futures expire next Friday making it one of the four notorious triple witching days that occur each year. Options and futures were not actively traded before the mid 1980's and looking at the tables below it is difficult to identify increased volatility they may have added to the period.

The week does have an extremely positive bias especially during the 2nd year of the Presidential Cycle. Since 1930, during the 2nd year of the Presidential Cycle, the SPX has been up 74% of the time and the OTC, since 1966 has been up 70% of the time.

Seasonally next week is one of the stronger weeks of the year.

Report for the week before witching Friday during Mar
The number following the year is the position in the presidential cycle.
Daily returns from Monday to witching Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -0.19% -0.92% -0.63% 0.23% 0.28% -1.22%
1970-2 -2.13% -0.76% 1.04% 0.17% 0.06% -1.62%
1974-2 0.74% -0.07% 0.55% 0.19% 0.02% 1.42%
1978-2 0.11% 0.13% 0.14% 0.56% 0.54% 1.46%
1982-2 -0.18% 0.21% -0.05% 1.15% 0.96% 2.09%
Avg -0.33% -0.28% 0.21% 0.46% 0.37% 0.43%
 
1986-2 -0.47% 0.38% 0.05% 0.27% -0.03% 0.21%
1990-2 -0.05% -0.45% 0.36% 0.44% 0.94% 1.24%
1994-2 0.46% 0.09% 0.69% 0.61% 0.01% 1.85%
1998-2 0.93% -0.50% 0.51% 0.65% -0.60% 0.99%
2002-2 -0.01% -1.68% -1.85% -0.42% 0.76% -3.20%
Avg 0.17% -0.43% -0.05% 0.31% 0.22% 0.22%
 
OTC summary for Presidential year 2 1966 - 2002
Avg -0.08% -0.36% 0.08% 0.38% 0.29% 0.32%
Win% 40% 40% 70% 90% 80% 70%
 
OTC summary for all years 1963 - 2005
Avg -0.25% -0.03% -0.04% 0.23% -0.05% -0.13%
Win% 49% 53% 63% 74% 53% 53%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1930-2 1.50% 0.97% 0.54% 0.46% 0.62% 4.10%
1934-2 1.86% 0.00% 0.09% -1.64% 0.28% 0.59%
1938-2 1.60% 3.06% -4.41% -0.85% -3.23% -3.82%
1942-2 1.25% 2.09% -0.97% -0.12% -1.10% 1.16%
 
1946-2 -0.80% 0.23% -1.55% -0.35% 1.11% -1.36%
1950-2 -0.12% 0.76% 1.16% 0.23% -0.23% 1.80%
1954-2 -0.45% -0.04% 0.23% 0.41% 0.30% 0.45%
1958-2 -0.69% -0.36% 0.48% 0.05% 0.74% 0.22%
1962-2 -0.03% 0.28% 0.44% 0.21% -0.17% 0.74%
Avg -0.42% 0.18% 0.15% 0.11% 0.35% 0.37%
 
1966-2 -1.13% -0.57% 0.58% 0.35% 0.41% -0.35%
1970-2 -1.08% 0.44% 0.29% -0.14% -0.41% -0.91%
1974-2 1.12% 0.27% 0.60% -0.09% -0.37% 1.53%
1978-2 0.08% 0.45% -0.26% 0.44% 0.77% 1.48%
1982-2 0.77% -0.16% -0.18% 1.12% 0.28% 1.83%
Avg -0.05% 0.09% 0.20% 0.34% 0.14% 0.72%
 
1986-2 -0.79% 0.47% -0.08% 0.40% -1.35% -1.35%
1990-2 0.22% -0.79% 0.26% 0.36% 1.14% 1.18%
1994-2 0.20% -0.08% 0.52% 0.32% 0.03% 0.99%
1998-2 1.00% 0.11% 0.46% 0.39% 0.87% 2.83%
2002-2 0.34% -0.23% -0.99% -0.09% 1.14% 0.17%
Avg 0.19% -0.10% 0.04% 0.27% 0.37% 0.76%
 
SPX summary for Presidential Year 2 1930 - 2002
Avg 0.26% 0.38% -0.15% 0.08% 0.04% 0.59%
Win% 58% 61% 63% 63% 63% 74%
 
SPX summary for all years 1928 - 2005
Avg -0.03% 0.12% -0.05% 0.22% 0.02% 0.28%
Win% 57% 56% 54% 59% 58% 59%

Conclusion

Nearly all of the indicators are pointing downward, however, the market got very oversold last week and seasonally next week has a very positive bias.

I expect the major indices to be higher on Friday March 17 than they were on Friday March 10.

Last week nearly all of the major indices were down lead by the mid and small caps which were down nearly 2%, however the DJIA was up .0.5% so I am calling last weeks negative 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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