Monday, April 14, 2008

Indicator Review for April 14th

Last week's indicator review noted significant buying pressure among stocks as we approached important resistance near 1400 in the S&P 500 futures contract. That post further observed some potential negatives on the horizon--weak advance-decline lines, an overbought market condition, and worrisome credit spreads--but anticipated a breach of the overhead resistance, given the market's apparent double bottom. "What would change my mind from this scenario," I explained, "would be reversals of the dynamics we're currently seeing in NYSE TICK, money flows, and the expansion of stocks making new highs. Particularly worrisome would be an expansion in the number of stocks making fresh 20-day lows."

Well, guess what? As we see from the bottom chart, the cumulative NYSE TICK did indeed roll over, as we failed to sustain the test of the important resistance area. Stocks fell back last week, ending Friday on a particularly weak note. New 20-day lows expanded through the week, with a Friday reading of 450 new highs and 545 new lows. My five-day indicator of money flows into the Dow Industrials stocks turned positive with the market's rally, but fell to a modest negative level by the end of the week. Those weak advance-decline lines weakened even further, making new bear lows across several sectors and, for the broad market (NYSE common stocks), is now near bear lows. Moreover, my measure of technical strength stalled out early in the week and intermarket themes associated with stock market weakness reasserted themselves.

So where does that leave us? My cumulative Demand/Supply indicator, which has done a terrific job of identifying recent short-term market tops and bottoms, is back in neutral territory. Given the recent expansion of stocks making new lows, the declining NYSE TICK line, and the weak advance-decline performance, the best we can say is that we are trapped in a trading range between that resistance near 1400 in the ES contract and the March price lows. A retest of those lows is not at all out of the question, particularly if we continue to see further weakening among these indicators. I'll be updating the indicators daily in my Twitter posts to keep readers up to speed.

It is not at all clear to me that the current weakness will bring a new bear market leg. The number of stocks registering fresh 52-week lows has been drying up since January. For example, among NYSE common stocks, we had over 700 new lows in January, but only a little more than 300 new lows at the March price lows. This past Friday, we had 19 annual new highs among NYSE common issues and only 42 lows. That cumulative NYSE TICK line shown above has indeed turned down, but is very well off its March lows. In the past, that has set us up for divergences and reversals of tests of trading ranges. Should we fail to sustain a move below the March lows, I believe we could see some real opportunity to the upside, given the market's historic oversold condition.

As long as the indicators continue to weaken, I remain defensive. I think it's fair to say that I'm cautiously bearish on a day-to-day basis and cautiously bullish on a longer-term basis. How we resolve the aforementioned trading range will have significant implications for stocks and the broader economy.