Monday, January 12, 2009

Indicator Update for January 12th

Last week's indicator review concluded that, "We are clearly overbought and some degree of short-term pullback is expected. If, indeed, we have put in an important market low and entered a bull phase, the rise should be a multi-month affair, not a brief rally. New 20-day highs should continue to outnumber lows, and pullbacks should stay well above last week's price lows." We did, indeed, get that pullback and, while prices stayed above their prior week's lows, the decline was sufficient to return us to the trading range that persisted through much of late 2008. Sectors moved from a dominant uptrend to a mostly non-trending mode and money flows pulled back, though they stayed well off their bear lows.

We went from a very overbought condition in the Cumulative Demand/Supply Index (top chart) to a moderately overbought one; to keep the bull intact, we want to see successively higher price lows on Cumulative DSI pullbacks. In a good bull market, those pullbacks represent intermediate-term buying opportunities. Similarly, 20-day highs vs. lows pulled back over the past week (middle chart), but new highs continue to outnumber new lows, suggesting that we have not thus far killed off the bull. The Cumulative Adjusted NYSE TICK (bottom chart) has only modestly retraced its solid gains from the last week of 2008 and the first part of 2009, again suggesting that this, so far, is more of a correction of the bull move than a resumption of the bear market.

To sustain the bull market, we need to see new 20-day highs continue to outnumber 20-day lows and we need to see a resumption of strength among sectors, money flow, and NYSE TICK. A move below the 850 region in the S&P 500 futures would represent a violation of important support and would break the pattern of higher lows on market pullbacks. A move back toward new highs that expands the number of stocks making fresh new highs and brings the Cumulative TICK and money flow to new highs would be very supportive of the bull thesis.

As always, I will update indicators each morning before the market open via Twitter. The last five "tweets" appear on the blog page under "Twitter Trader"; the full list can be found on my Twitter page, where readers can also sign up for a free subscription via RSS.