Sunday, January 24, 2010

Indicator Update for January 24th

Last week's indicator review found that we had fallen into a range after starting the year on a bullish note. With the stock market decline late this past week, we've now come full circle and retraced the new year's strength, falling back into a multi-month trading range.

A major issue going forward will be whether stocks can hold above their November/December lows. Thus far, we have not seen an explosion of new 65-day lows, even though 20-day lows rose to over 2000 across the NYSE, NASDAQ, and ASE (top chart). Should we see a meaningful expansion of 65-day lows, that would tell me that we're in an intermediate-term corrective mode and could revisit the October lows.

We have dropped to the point in my Cumulative Demand/Supply Index (second chart from top) and momentum measure (second chart from bottom) where we normally expect to see a market bounce. I will be watching closely for the vigor of that bounce; if it is not strong, I'd expect at the very least a test of momentum lows.

Meanwhile, the sectors (bottom chart) are trading in short-term downtrends according to my proprietary measure of Technical Strength. The one exception is Health Care, which is still in a neutral mode. We saw particularly bearish swings in the last week in Industrial and Technology shares; the commodity-related Materials and Energy stocks were also weak.

All in all, we're extended to the downside, but with all indicators weakening, I'm not looking to catch falling knives. Should we stabilize around the November/December lows and begin to see some firming of the indicators, I would be treating this as a longer-term trading range and looking for areas to be buying. Until we see fewer stocks making 20-day lows, however, and improvement in the Demand/Supply numbers, it is premature to act on that idea.