Monday, September 14, 2009

Indicator Update for September 14th

Last week's indicator review noted divergences in the market and a pullback among the indicators that I track, but concluded, "Still, it is clear--particularly from the Cumulative DSI--that we are getting relative oversold readings at successively higher lows in the market, which is the mark of a bull market. Until that pattern changes, it is premature to conclude that we're rolling over to bear status."

That turned out to be an important caveat, as most of the market indexes rallied smartly to new bull highs this past week. The Adjusted Cumulative DSI (top chart) has returned to moderately overbought levels, continuing the pattern of higher price highs and higher lows on successive DSI peaks and valleys. Given the tendency of the DSI to peak ahead of price, we could see the market grind further higher here, even as upside momentum slows (as it did on Friday).

My apologies for the mislabeling of the middle chart, which should read "65-Day Highs Minus Lows". I charted the 65-day number so that you could see how the recent rally has shown strength relative to the peak earlier in August and how we are gaining strength as the recent rally has progressed.

The chart of the advance-decline line for common stocks within the NYSE Composite Index (kudos to Decision Point for the helpful perspective) shows clear new highs with the recent rally. This fits with the earlier sector analysis, which shows the major stock sectors mostly in short-term uptrends.

Intermarket themes--weak U.S. dollar, strong commodities--are supporting the strength in the stock market and indeed led the recent upsurge. We will need to see an unwinding of risk appetite across these asset classes before the bull is ready to reverse in a sustained way. As always, I will be updating these and other indicators via Twitter before the market open (follow here) to see if we are sustaining strength or moving into a period of consolidation.

Here are weekly price targets for SPY: Pivot = 104.23; R1=106.64; R2=107.12; R3=107. 76; S1=101.82; S2=101.34; S3=100.70.