Tuesday, January 20, 2009

Indicator Update for January 20th

Last week's indicator review concluded that a resumption of the bull move needed to see new 20-day highs continue to outnumber 20-day lows and a resumption of strength among sectors, money flow, and NYSE TICK. "A move below the 850 region in the S&P 500 futures would represent a violation of important support and would break the pattern of higher lows on market pullbacks." We did, in fact, get that pullback below 850, returning us to well inside the trading range that dominated during the latter part of 2008.

The pullback took us from a highly overbought level in the Cumulative Demand/Supply Index (top chart) to a neutral level and returned us to a situation in which new 20-day lows once again are outnumbering new 20-day highs among NYSE, NASDAQ, and ASE issues (middle chart). Sector technical strength has turned negative; as I noted in my morning Twitter update today, only 2 stocks in my basket were trading in uptrends; 15 were neutral; and 23 were in short-term downtrends.

As the chart from Decision Point (bottom) indicates, the advance-decline line for NYSE common stocks is only modestly off its recent highs. This relative strength is also reflected in a Cumulative NYSE TICK line that is not far off its recent peak. Selling pressure has been intense in the financial sector; the big question going forward is whether or not this weakness spills over to the broad market. I will be watching Cumulative TICK closely and posting to the blog on the topic as one way of addressing this issue.

In sum, the move to price highs early in January has been reversed, and we are back to seeing 20-day lows exceeding new highs. As long as the new highs/lows remain weak, I expect continued price weakness and tests of the bear market lows. A move above the January highs, particularly on strong breadth and with solid expansion of new highs, would be decidedly bullish. The first order of business for bulls is to sustain prices above the weekly pivot of 85.19 in SPY. Failure to do so targets the weekly S1 level a bit below 80. (Daily, weekly, and monthly price targets are sent out via Twitter, along with daily updates of indicators; subscription via RSS is free).