Monday, August 03, 2009

Indicator Update for August 3rd

The recent sector review found that most of the S&P 500 sectors continue to trade in short-term uptrends. The indicators support this bullish view, as we see significant positive momentum among stocks (top chart) and new 20-day highs greatly outnumbering new lows (middle chart). The ability of the index to steadily post new highs in the face of strong Demand vs. Supply (i.e., more stocks closing above the volatility envelopes surrounding their moving averages than closing below them) is typical of bull market action. Generally, we don't see significant market corrections until the cumulative Demand/Supply line (top chart) posts lower highs on market strength.

Similarly, we're not seeing any expansion of new 20-day lows, which typically precedes intermediate-term market corrections. Indeed, new 65-day highs made a new peak for this upmove on Thursday, suggesting that market strength has been quite robust.

Finally, note the new highs in the advance-decline line specific to NYSE common stocks, as posted by the excellent Decision Point site. The breadth of market strength on the new highs suggests that we are not yet seeing meaningful topping behavior.

In sum, while upside momentum has tailed off and we could see a normal pullback following strength, the indicators suggest underlying strength to the market rise. Since the momentum and strength measures tend to top well ahead of price, I expect to see higher prices for stocks before we have to be concerned about a fresh bear market. A move below 950 in the ES futures, accompanied by expanding new 20-day lows, would have me questioning the bull thesis.