Monday, March 22, 2010

Indicator Update for March 22nd

This past week, we saw excessive bullish sentiment but also considerable strength among the indicators. Last week's update noted that the bull market was still in force, but that we had lost upside momentum and could see a breather in the persistent rise. On Friday we got that breather, and price weakness continues into premarket trading on Monday as I write this.

The sectors that I track each week for Technical Strength (a proprietary measure of short-term trending) remain in bullish mode (top chart), with the exception of Materials shares, which fell back to neutral amidst late week commodity selling.

The Cumulative Demand/Supply Index (DSI; second chart from top), which tracks market momentum did indeed top out ahead of price as is usually the case, but remains above zero. In a solid bull trend, we can make fresh bull highs on successively lower DSI readings; that is my expectation as long as stocks can stay above their January highs and sustain their upside breakout.

We also saw 20-day new highs minus lows (second chart from bottom) top out ahead of the market and pull back on Friday. Friday was the first day in which we began to see an expansion of 20-day new lows, as I posted this morning to Twitter. I will be watching this measure closely. Should we continue to sustain expanded new lows even on a move back toward bull highs, I would start thinking of an intermediate-term topping process.

My proprietary measure of stock market momentum (bottom chart) also topped out ahead of price, but remains a bit above its neutral level of 1.0 and is not yet at levels that have characterized recent short-term market bottoms. Indeed, with over 70% of stocks still trading above their 20-day moving averages, we are nowhere near oversold levels that have characterized recent intermediate-term bottoms.

In sum, we have seen an unusually persistent move to new bull highs, confirmed by such indicators as advance/decline lines and new highs/lows. In the wake of weakening upside momentum, we're now seeing a pullback in stocks that is taking us off what could well be the momentum highs. I expect that we have not seen actual price highs for this move, which means that we should see a buying opportunity when the current correction runs its course. I would be especially bullish if we can hold the 1130-area support in the ES futures. A very significant expansion of 20-day new lows during this corrective move would turn my upside expectations much more cautious.