Wednesday, August 26, 2009

Why I'm a Nervous Bull: Non-Confirmations Persist

If you read my post on transition patterns in the market, you'll see why I'm a nervous bull. While the sectors are quite strong and we're seeing new advance-decline line highs, the new highs in the S&P 500 Index (SPY; top chart) remain unconfirmed by a number of sectors and indexes. While emerging markets (EEM; bottom chart) were the drivers for the rally since March, they have failed to make new highs recently.

What suggests to me that this may not be an isolated phenomenon is that commodities (DBC) have also failed to make new highs and commodity-related sectors (XLB, XLE) have not confirmed new highs in the S&P 500 Index. If growth and commodity demand won't come from the emerging nations, it is difficult to believe that the slower growing developed markets will sustain the bull.

Yet other non-confirmations come from the number of stocks registering fresh 20- and 65-day highs. Those peaked in July and are notably lower during the recent market highs, suggesting that fewer issues are participating in the index strength. That's usually not a recipe for ongoing market strength.

It also raises the possibility that we saw a momentum high in July, a stiff pullback last week, and now price highs on lower participation. If this is, indeed, a larger timeframe transition pattern in the making, we should fail at these highs and begin a sharp pullback that would take us below the lows of last week.

While I stick with my short-term indicators, such as Cumulative TICK and Demand/Supply, and those are bullish, the larger picture non-confirmations leave me nervous and ready to reverse views. We need to see day-over-day strength here, confirming the bull move. Expanding new 20-day lows would be an important indication that all is not well for the bull. Expanding 20-day highs would be important support for the bulls. As always, I'll be updating indicators via Twitter (free; subscribe/follow here)