Technical Market Report

By: Mike Burk | Sat, May 6, 2006
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The good news is:
• All of the major indices except the NASDAQ composite (OTC) and Dow Jones Utilities (DJU) closed at multi year highs Friday.

Short term

It is a little unusual to have more than 3 consecutive up or down days in an index. When there are more than 3 consecutive days in either direction it can be a confirmation of direction or an indication of a change in direction.

The chart below covers the past year showing the Russell 2000 (R2K) in red with an indicator showing the percentage of the previous 4 trading days that were up in blue. There are dashed vertical black lines on the 1st trading day of each month and a dashed vertical red line on the 1st trading day of the year.

During the 1st three months the indicator hit the top of the chart several times and never touched the bottom of the screen confirming the upward trend of prices. In early August the indicator touched the bottom of the screen for the first time which coincided with a change in direction that lasted for 3 months. The indicator did not signal the October low, but, the direction change was confirmed in November, December and January when the indicator touched the top of the chart several times during that period. The indicator touched the bottom of the chat in early March then hit the top of the chart again later in March confirming the up trend. Finally the indicator hit the bottom of the chart twice in April and the top again last Friday.

Next week should be telling. Each consecutive up day beyond 4 is indicative of strength and suggests the bull is alive.

Intermediate term

In a strong market new highs increase as prices rise. Leadership narrows as a top is approached generating fewer new highs. The chart below shows the OTC in red and a 10% trend (19 day EMA) of NASDAQ new highs in green. The indicator peaked on the 1st of February and failed to confirm (reach a new high simultaneously with the index) recent highs in the index. The indicator has been in an unconvincing downtrend (lower highs) since its early February high.

The next chart is similar to the one above except the index is the R2K which hit an all time high on Friday and the indicator is a 10% trend of new highs calculated from the component issues of the R2K. New highs were calculated over the trailing 6 weeks rather than 52 weeks as reported by the exchanges. This indicator also hit its high on the 1st of February, but it has been in a clearly defined down trend since then.

The next chart is similar to the one above except the index is the S&P 500 (SPX) and the indicator has been calculated from the component issues of the SPX. This indicator is near its lows while the index is at a high.

The R2K has been the stellar performer this year so it is not surprising that new highs calculated from its components are stronger than the SPX, but neither of those new high indicators suggests strength.

As the market moves up and down volume of advancing issues increases during up moves and decreases during down moves while volume of declining issues does the opposite.

The chart below covers the past year showing the OTC in red and a 4% trend (55 day EMA) of volume of NASDAQ declining issues in blue (OTC DV). OTC DV is plotted on an inverted Y axis so decreasing OTC DV moves the indicator upward while increasing OTC DV moves the indicator downward (up is good).

Since the 1st of the year OTC DV has increased to its highest level of the past year (actually its highest level in nearly 4 years) while prices have been rising.

The next chart is similar to the one above except it covers the past 4 years.

Seasonality

Next week includes 5 trading days prior to the second Friday in May during the 2nd year of the Presidential cycle.

The tables below show daily returns for the OTC from 1963 - 2005 and for the S&P 500 (SPX) 1928 - 2005 during the 2nd year of the Presidential Cycle. There are summaries for both the 2nd year and all years combined.

The average returns are all negative. The OTC over all years combined has been up 56% of the time with an average return of -0.09%.

Report for the week before the 2nd Friday during May
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.

OTC Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1966-2 -0.56% -1.30% 0.12% 0.07% -0.86% -2.53%
1970-2 0.05% -2.37% 0.26% 0.01% 1.27% -0.78%
1974-2 -0.18% -0.74% -1.06% 0.08% -1.76% -3.67%
1978-2 -0.11% -0.08% 0.43% 0.60% 0.97% 1.81%
1982-2 -0.30% -0.74% 1.00% -0.21% 0.30% 0.06%
Avg -0.22% -1.04% 0.15% 0.11% -0.02% -1.02%
 
1986-2 0.74% 0.07% -0.25% 0.54% 0.44% 1.54%
1990-2 0.61% 0.14% -0.12% 0.43% 1.13% 2.20%
1994-2 -1.35% 0.28% -1.10% 0.36% -0.37% -2.18%
1998-2 0.20% -0.66% -0.44% -1.16% 1.60% -0.46%
2002-2 -2.14% -0.30% 7.78% -2.70% -3.01% -0.36%
Avg -0.39% -0.09% 1.18% -0.51% -0.04% 0.15%
 
OTC summary for Presidential Year 2 1966 - 2002
Avg -0.30% -0.57% 0.66% -0.20% -0.03% -0.44%
Win% 40% 30% 50% 70% 60% 40%
 
OTC summary for all years 1963 - 2005
Avg -0.12% -0.12% 0.00% 0.05% 0.10% -0.09%
Win% 51% 49% 53% 63% 60% 56%
 
SPX Presidential Year 2
Year Mon Tue Wed Thur Fri Totals
1930-2 0.61% 3.39% -1.89% 0.39% 1.24% 3.74%
1934-2 -3.44% 2.45% -1.69% -2.33% -1.04% -6.05%
1938-2 2.21% -1.88% 0.58% -0.57% -1.63% -1.30%
1942-2 0.26% 0.39% -0.13% 1.28% 0.00% 1.80%
 
1946-2 -0.81% 1.37% -0.22% -0.16% 1.63% 1.80%
1950-2 -0.33% 0.00% 0.11% 0.00% -0.60% -0.82%
1954-2 -0.10% -0.45% 0.81% -0.56% 0.84% 0.53%
1958-2 0.23% 0.50% -0.18% 0.14% 0.02% 0.71%
1962-2 -0.33% -1.29% -1.40% -1.07% -1.45% -5.54%
Avg -0.27% 0.03% -0.18% -0.41% 0.09% -0.66%
 
1966-2 -1.73% 0.88% 0.17% -1.15% -0.88% -2.71%
1970-2 -2.54% -0.97% 1.11% 0.45% -0.49% -2.44%
1974-2 -0.19% 0.37% 0.20% 1.44% -1.60% 0.22%
1978-2 -0.35% -0.30% 0.02% 1.33% 0.90% 1.60%
1982-2 -0.91% 0.88% -0.21% -0.80% -0.18% -1.22%
Avg -1.14% 0.17% 0.26% 0.26% -0.45% -0.91%
 
1986-2 1.25% -0.21% -0.49% 0.44% 0.30% 1.31%
1990-2 0.63% 0.43% 0.25% 0.28% 2.38% 3.97%
1994-2 -1.23% 0.83% -1.01% 0.51% 0.09% -0.81%
1998-2 0.10% -0.58% -0.96% -0.89% 1.19% -1.14%
2002-2 -1.93% -0.30% 3.75% -1.45% -1.68% -1.62%
Avg -0.24% 0.04% 0.31% -0.22% 0.46% 0.34%
 
SPX summary for Presidential Year 2
Avg -0.45% 0.31% -0.06% -0.15% -0.05% -0.42%
Win% 37% 56% 47% 50% 50% 47%
 
SPX summary for all years 1928 - 2005
Avg -0.16% 0.10% 0.04% -0.17% 0.01% -0.18%
Win% 39% 51% 52% 47% 53% 42%

Conclusion

Widespread multi year and all time highs can lead one to question his bearhood. I entertained the idea of writing this report from a bullish perspective, but could not do it. Leadership is narrowing and downside volume is approaching the levels of the 2002 low. Prices are being held up by a lot of upside volume going into diminishing number of issues. That pattern is consistent with a top and it is likely the date of that top is near.

I expect the major indices to be lower on Friday May 12 than they were on Friday May 5.

Last weeks negative forecast was a miss.

This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html If it is not for you, reply with REMOVE in the subject line. Gordon Harms produces a PPT for our local timing group. You can get a copy of that at: http://www.stockmarket-ta.com.

 


 

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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