Technical Market Report

By: Mike Burk | Sat, Apr 1, 2006
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The good news is:
 • The Russell 2000 (R2K) and S&P Mid cap hit all time highs last week while the NASDAQ composite (OTC) and Wilshire 5000 hit multi-year highs last week.

Short term

The new high indicator (NH) is a 10% trend (19 day EMA) of new highs. NH is useful for sorting out the short term direction of the market. If the indicator is rising and continues to rise on a down day it is likely the down day is not the beginning of a short term trend change. The same is true if the indicator is falling and continues to fall on an up day.

The chart below shows NH calculated from NASDAQ new highs in green and the OTC in red. The current value of the indicator is 153 so any number of new highs greater than 153 will keep the indicator moving upward.

Intermediate term

The secondaries lead both up and down. Accutrack (AT) is a FastTrack relative strength indicator. The chart below shows the OTC in red and AT comparing the R2K with the S&P 500 (SPX) in black.

AT is moving sharply upward indicating the R2K is significantly outperforming the SPX.

When the market rises, the volume of issues moving upward usually rises while the volume of issues moving downward usually falls. Nothing surprising there.

Since the first of this year volume of both rising and falling issues has been increasing.

The chart below shows the OTC in red, a 4% trend (55 day EMA) of NASDAQ upside volume (OTC UV) in green and a 4% trend of NASDAQ downside volume (OTC DV) on an inverted Y axis in blue. The Y axis for OTC DV is inverted to make the chart easier to read - up is good.

The chart below begins late last September, prices bottomed in early October and OTC UV began increasing while OTC DV began decreasing. About the 1st of December prices began a modest decline and OTC UV fell while OTC DV rose (fell on the chart because of the inverted Y axis). Volume always falls off sharply the last week of December so that part of the chart should be ignored. The 1st trading day of the year is indicated by the red vertical dashed line. In the first few days of this year prices rose sharply and, as you would expect, OTC UV rose while OTC DV fell (inverted Y axis).

Nothing surprising so far, but now it gets funny. Since early January, both OTC UV and OTC DV have been rising.

There are not many examples of periods when both OTC UV and OTC DV increased simultaneously over an extended period. The best one I found is represented in the chart below ending March 2000 when OTC UV began falling off and prices collapsed.

Seasonality

Next week includes the first 5 trading days of April in the 2nd year of the Presidential Cycle.

Last week the market followed the average seasonal pattern very closely with the secondaries outperforming the blue chips. This week the average seasonal pattern reverses.

Since 1966 during the 2nd year of the Presidential Cycle the OTC has been up half of the time with a modest loss on average. Since 1930 the SPX has been up 68% of the time with a substantial gain on average.

The tables below show the daily performance of the OTC during the 2nd year of the Presidential Cycle since 1966 and the SPX since 1930 with summaries for the 2nd year of the Presidential Cycle and for all years since 1963 for the OTC and all years since 1928 for the SPX.

First 5 days of April.
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 2
Year Day1 Day2 Day3 Day4 Day5 Totals
1966-2 0.41% 5 0.32% 1 0.43% 2 0.39% 3 0.83% 4 2.38%
1970-2 0.52% 3 0.17% 4 0.10% 5 -0.27% 1 -0.23% 2 0.29%
1974-2 -0.40% 1 0.14% 2 0.11% 3 -0.27% 4 -1.28% 5 -1.71%
1978-2 -0.29% 1 0.29% 2 0.71% 3 0.49% 4 0.71% 5 1.90%
1982-2 0.95% 4 -0.42% 5 0.93% 1 0.26% 2 0.69% 3 2.41%
Avg 0.24% 0.10% 0.45% 0.12% 0.14% 1.05%
 
1986-2 -0.15% 2 -0.01% 3 0.10% 4 -0.61% 5 -0.68% 1 -1.34%
1990-2 -0.54% 1 1.03% 2 -0.51% 3 -0.46% 4 -0.58% 5 -1.06%
1994-2 -2.16% 1 3.24% 2 -0.03% 3 0.59% 4 -0.86% 5 0.78%
1998-2 0.65% 3 0.29% 4 0.13% 5 -1.42% 1 -1.66% 2 -2.01%
2002-2 0.94% 1 -3.13% 2 -1.11% 3 0.30% 4 -1.10% 5 -4.10%
Avg -0.25% 0.28% -0.28% -0.32% -0.98% -1.55%
 
OTC summary for Presidential Year 2 1966 - 2002
Averages -0.01% 0.19% 0.09% -0.10% -0.42% -0.25%
% Winners 50% 70% 70% 50% 30% 50%
MDD 4/5/2002 4.97% -- 4/7/1998 3.06% -- 4/4/1994 2.16%
 
OTC summary for all years 1963 - 2005
Averages -0.16% 0.09% 0.16% 0.20% -0.01% 0.29%
% Winners 49% 65% 70% 56% 58% 60%
MDD 4/4/2001 10.95% -- 4/4/2000 9.27% -- 4/5/2002 4.97%
 
SPX Presidential Year 2
Year Day1 Day2 Day3 Day4 Day5 Totals
1930-2 0.91% 2 -1.02% 3 0.20% 4 1.51% 5 0.74% 6 2.34%
1934-2 0.09% 1 0.74% 2 0.28% 3 0.28% 4 0.46% 5 1.85%
1938-2 4.82% 5 3.93% 6 -0.22% 1 2.60% 2 -2.22% 3 8.92%
1942-2 0.50% 3 0.75% 4 0.00% 6 1.11% 1 -0.49% 2 1.87%
 
1946-2 -0.11% 1 0.06% 2 1.72% 3 1.09% 4 -0.22% 5 2.53%
1950-2 0.29% 6 1.10% 1 0.11% 2 0.46% 3 0.85% 4 2.81%
1954-2 0.85% 4 0.15% 5 0.18% 1 -0.92% 2 0.37% 3 0.64%
1958-2 -0.40% 2 -0.79% 3 -0.29% 4 -0.36% 1 0.73% 2 -1.12%
1962-2 -0.26% 1 -0.81% 2 -0.47% 3 0.61% 4 -0.10% 5 -1.02%
Avg 0.07% -0.06% 0.25% 0.18% 0.33% 0.77%
 
1966-2 0.80% 5 0.91% 1 0.61% 2 0.27% 3 0.22% 4 2.81%
1970-2 0.49% 3 -0.31% 4 -0.45% 5 -0.70% 1 -0.27% 2 -1.24%
1974-2 -0.78% 1 0.11% 2 1.05% 3 0.00% 4 -1.40% 5 -1.02%
1978-2 -0.84% 1 0.45% 2 0.88% 3 0.17% 4 0.42% 5 1.08%
1982-2 1.63% 4 1.17% 5 -0.34% 1 0.55% 2 0.09% 3 3.10%
Avg 0.26% 0.47% 0.35% 0.06% -0.19% 0.95%
 
1986-2 -1.57% 2 0.24% 3 -1.37% 4 -1.63% 5 -0.03% 1 -4.36%
1990-2 -0.36% 1 1.46% 2 -0.74% 3 -0.11% 4 -0.19% 5 0.06%
1994-2 -1.54% 1 2.13% 2 -0.05% 3 0.63% 4 -0.84% 5 0.34%
1998-2 0.58% 3 1.07% 4 0.24% 5 -0.12% 1 -1.06% 2 0.72%
2002-2 -0.07% 1 -0.85% 2 -1.00% 3 0.08% 4 -0.32% 5 -2.16%
Avg -0.59% 0.81% -0.59% -0.23% -0.49% -1.08%
 
SPX summary for Presidential Year 2 1930 - 2002
Averages 0.27% 0.55% 0.02% 0.29% -0.17% 0.95%
% Winners 53% 74% 47% 63% 42% 68%
MDD 4/7/1986 4.30% -- 4/6/1938 2.22% -- 4/5/2002 2.15%
 
SPX summary for all years 1928 - 2005
Averages 0.09% 0.15% 0.10% 0.19% -0.08% 0.44%
% Winners 60% 56% 54% 62% 54% 62%
MDD 4/6/1932 10.67% -- 4/6/1939 5.33% -- 4/4/2001 4.92%

For more information about the Presidential Cycle go to: http://alphaim.net/newsletter.html. Select Alpha Research Reports.

April

The average month has 21 trading days so the charts below have been constructed by averaging the return of the 1st 11 trading days of the month and the last 10 trading days of the month. Dashed vertical lines have been drawn after the 1st trading day and then at 5 trading day intervals. The thick vertical line has been drawn on the 11th trading day which is also the break point.

The 1st chart below shows the average performance of the OTC for April. The black line is the average for all years since 1963 while the blue line is the average for the 2nd year of the Presidential Cycle since 1966.

The next chart shows the SPX for all years since 1928 in green and the 2nd year of the Presidential Cycle since 1930 in blue.

Conclusion

The secondaries were overbought last week and are more overbought this week. The typical seasonal pattern suggests the blue chips will lead the move upward next week. On average the high for the 2nd year of the Presidential Cycle occurs in late April so the unusual OTC UV / OTC DV patterns could be an indication of that event.

I expect the major indices to be higher on Friday April 7 than they were on Friday March 31.

Last week the blue chip indices were down while the small cap indices were up 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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