Sunday, March 07, 2010

Indicator Update for March 7th

Last week's indicator review found evidence of indicator deterioration, but also signs that the market was holding up well in the face of negative news. After rangebound trade early in the week, we broke decisively higher, sending all the major indicators into bullish ground.

Technical Strength (top chart), my proprietary measure of short-term trending, turned bullish across the sectors this past week, with only Health Care in neutral mode. Particular week-over-week strength was seen among Energy and Materials shares, as commodities rebounded smartly. No sectors weakened over the week; this was a broad market rally.

Note that my Cumulative Demand/Supply Index (second chart from top) continued to hit new highs on Friday. As I stressed last week, this indicator tends to top out ahead of price, so as long as we're seeing Demand/Supply strength, it's premature to expect a major reversal in stock prices. (I update trend status of the stocks in my basket and Demand/Supply every morning before the open via Twitter).

We can also see that new 20-day highs among NYSE, NASDAQ, and ASE shares expanded this past week, swamping new lows. This is another indicator that tends to top ahead of price, suggesting that we could see further highs in the days and weeks ahead. New 65-day highs on Friday neared the level registered at the January peak, as we've retraced most of the subsequent decline.

Finally, I've posted the bottom chart from Decision Point for a few weeks now, illustrating how small cap stocks have led the large caps during the recent rally--another sign of strength. Notice how the advance/decline line for the small caps has broken out of its range and is soaring to fresh bull highs.

In sum, the indicators are in gear to the upside. That doesn't mean that we can't get some profit taking and consolidation in the days ahead. As long as we continue to see very few 20-day lows, a rising advance/decline line, and a firm Cumulative DSI, the path of least resistance will be to the upside for a test of bull highs across the major indexes.