Monday, November 03, 2008

Indicator Update for November 3rd

Last week's indicator update noted that "While I'm making note of the divergences with respect to the number of new lows from two weeks ago, enough stocks continue to behave in weak ways to make me want to see confirmation of fresh buying interest before taking intermediate-term long positions in stocks." We did, indeed, get that confirmation of buying interest this past week, as strength in the Cumulative TICK line and a positive turn in money flow led to a breakout move in stocks that was sustained into week's end on solid buying interest.

On Friday, we saw the first occasion in which stocks making fresh 20-day highs notably outnumbered those making new lows (data updated each AM before market opening via Twitter). We're not yet to the point where we're seeing stocks making significant numbers of new 65-day highs (top chart), but we've clearly pulled the majority of shares off their recent lows.

Meanwhile, for the first time since the decline began, we're getting overbought readings from the Cumulative Demand/Supply Index (bottom chart). Indeed, we're at levels similar to the August top in markets. It's not unusual to get topping out action following a sharp spike in the Cumulative DSI, with prices drifting higher, but the overbought level--combined with the significant resistance around the 1000 level in the S&P 500 Index--suggest that future near-term gains may be more constrained than they were this past week. Note, however, that this is a short-term overbought indication; the majority of sectors that I follow are not overbought on an intermediate-term basis.

Thus far, I'm viewing the current market action as part of a larger bottoming pattern that began with the momentum flush out in mid October. It is not at all unusual to see such bottoming occur over a period of weeks if not months following significant declines; this was the case in 1982, 1987, 1990, 1994, 1998, and 2002. If that is the case, we should have trouble vaulting and staying above that 1000 level in the S&P 500 Index. I will be watching the Cumulative TICK and sector strength carefully to handicap the odds of an upside breakout versus a move back into the heart of the recent, wide trading range.