Monday, January 05, 2009

Indicator Update for January 5th

Last week's indicator review concluded, "The low 900 area continues to serve as important resistance for the S&P 500 Index; a break above that level accompanied by strong sector participation and new high strength would be an important signal for longer-term bulls." We did, indeed, see such an upside break, as strength became evident among the indicators and stock market sectors and indexes. Indeed, the sectors are now clearly in a bullish mode, having broken from their multi-week trading range.

The Cumulative Demand/Supply Index (top chart) is quite stretched to the upside, but note that we're seeing a pattern of higher highs, with pullbacks remaining above the zero level. That persistence is typical of bull market action. During bull phases, pullbacks in the DSI toward a neutral area typically signal good entries for swing positions to the long side.

Note how we've also seen a sizable increase in new 20-day highs vs. lows (second chart), indicating broad participation in the market rally. The Cumulative Adjusted NYSE TICK (third chart) has moved solidly to new highs; note the increase in its slope, as buyers lifted offers in size during the market breakout.

Money flow for the Dow Industrial issues, while not at new highs, has been moving steadily higher (bottom chart) over the last two weeks.

We are clearly overbought and some degree of short-term pullback is expected. If, indeed, we have put in an important market low and entered a bull phase, the rise should be a multi-month affair, not a brief rally. New 20-day highs should continue to outnumber lows, and pullbacks should stay well above last week's price lows. Particularly supportive of the bull move would be a relatively flat corrective period in which the former resistance around 900 in the S&P 500 Index becomes support. A move back into the trading range, particularly on high volume and weak NYSE TICK, would pose important questions for bulls.

A review of last week's indicator data that I post each morning before trading days via Twitter will clearly show the evolution of the market's strength. These data are particularly useful in identifying whether markets are strengthening, weakening, or remaining range bound. This can be helpful in keeping traders from fighting trends--or assuming trends when none exist. The data can be observed on the blog page under "Twitter Trader" or are available via free RSS subscription.