Monday, February 02, 2009

Indicator Update for February 2nd

Last week's indicator update concluded, "In sum, the indicators are leaning to the downside; as long as that continues, I expect a test of the 800 level and possibly the bear lows in SPX; but I also see evidence of diminished selling pressure during the recent market weakness." After market strength midweek, we saw a notable reversal and, as of this writing, we are hovering just above that 800 level. Weakness has been present across the major sectors that I follow and new 20-day lows are once again outnumbering new lows (middle chart), but downside selling pressure has been muted, as observed in the Dow money flow numbers and the Cumulative NYSE TICK (bottom chart). After the pop during the week took us to overbought status in the Cumulative Demand/Supply Index (top chart), we've since retreated to neutral status.

Take a moment to examine the peaks in the Cumulative DSI since early 2008. You will see that they are occurring at successively lower price levels in the S&P 500 Index (SPY). This is a hallmark of a bear market. While not all dips in Cumulative DSI have terminated at lower price lows, we have not been able to sustain buying interest to make successive price highs. A drying up of selling is necessary to turning a bear market around, but it is not sufficient. We need to see enhanced buying interest--new highs in Cumulative TICK, stocks making new highs outnumbering new lows on a sustained basis, sustained positive money flow--to maintain an upward trend. To this point, such buying interest has been missing. I expect to break the 800 level in the S&P 500 Index and test new bear market lows if that situation persists.

Here are the proprietary weekly price targets for SPY: Pivot = 83.96; R1 = 89.35; R2 = 90.43; R3 = 91.87; S1 = 78.56; S2 = 77.48; S3 = 76.04. Please note that daily targets are published via Twitter prior to each morning update; subscription via RSS is free, and recent posts appear on the blog page under the heading "Twitter Trader".

Blog readers are also familiar with my use of Relative Volume to update probabilities of hitting the various target levels. Here are the 30-minute median volume figures for the ES contract going back to early January. Standard deviations are in parentheses:

8:30 - 240,844 (60,591)
9:00 - 190,333 (54,101)
9:30 - 141,612 (53,167)
10:00 - 125,907 (34,042)
10:30 - 104,164 (39,081)
11:00 - 99,052 (39,906)
11:30 - 88,368 (38,236)
12 N - 108,429 (34,375)
12:30 - 118,164 (48,020)
1:00 - 122,828 (62,572)
1:30 - 134,227 (62,724)
2:00 - 159,926 (47,535)
2:30 - 230,563 (75,639)
3:00 (15 min period) - 97,482 (26,715)

When possible, I will be updating morning Relative Volume observations in real time via Twitter posts. Have a happy and successful trading week.