Sunday, February 14, 2010

Indicator Update for February 14th

Last week's indicator review suggested that we had put in a momentum low in the stock market, with possible tests of the lows to follow. We indeed see follow-through weakness in stocks this past week, but prices held above 1050 in the S&P 500 Index futures before we closed the week higher.

Note from the 20-day new highs minus lows (top chart) that the great majority of issues have pulled off their recent lows, with new highs running close to the level of new lows. I use a cumulative running total of new highs minus lows as an intermediate-term trend indicator. We need to see an expansion of new highs relative to lows to return us to an uptrend. A bounce with feeble new high/low strength would place us in a pattern of making lower price highs following a break of the December, 2009 lows. For that reason, I am reluctant to chase price strength that cannot push new highs meaningfully above lows.

At the same time, I will be watching closely for any break below that 1050 area to see if new 20-day lows are expanding. A test of that area with broad non-confirmations from sectors and new highs/lows would be consistent with a bottoming process and the pattern of momentum lows followed by subsequent tests.

Note that, despite the recent bounce, the eight S&P sectors that I follow weekly (middle chart) remain largely in short-term downtrends according to my proprietary Technical Strength measure. Consumer-related sectors strengthened week-over-week, as did Energy stocks. Financial and Industrial shares remain relatively weak. Once again, I need to see sectors display positive Technical Strength before trusting market bounces and committing to the long side.

Finally, if you take a look at the advance-decline line specific to NYSE common stocks--a very useful perspective from Decision Point--we find that we have, indeed, done technical damage to the stock market during the recent decline. Moreover, the recent bounce has not added significant advance-decline strength to the market. I am watching the October/November lows in this indicator very closely; a break of those would suggest a continuation of an intermediate-term downtrend.

In all, we've seen a bounce off apparent momentum lows, but no resumption of bullish market action. The recent market behavior is consistent with a bottoming process and an intermediate-term correction in an ongoing bull market. I am watching the indicators closely, however, for signs that the correction could deepen in the wake of troubling news from Europe, Dubai, and China and continued saber-rattling in the Middle East.