Monday, February 09, 2009

Indicator Update for February 9th

Last week's indicator review found that weakness was present, but that selling pressure was muted. I noted that a drying up of selling was necessary for putting in a durable market bottom, but was not sufficient. What we also need to see is an expansion of buying interest.

That buying interest showed itself late in the week, with a notable gain on Friday on strong money flows. This turned the major S&P 500 sectors bullish, though not at overbought levels of Technical Strength. Reflecting that strength, by Friday new 20-day highs among NYSE, NASDAQ, and ASE stocks were once again outnumbering new lows (middle chart).

Interestingly, my Cumulative Demand/Supply Index, which has done a respectable job of catching intermediate-term highs and lows, is now at levels typically seen near market highs. In a bull market, we can see overbought Cumulative DSI readings sustained over time, as the market ratchets higher, with more stocks trading above their short-term volatility envelopes (Demand) than below (Supply). Conversely, in bear markets, these elevations of Cumulative DSI tend to become opportunities for sellers to get good prices, sustaining the downtrend.

We continue to see peaks in Cumulative DSI at successively lower price highs, which--as noted in last week's update--is a hallmark of a bear market. I am watching carefully to see if the major indexes can sustain a move above their late January highs, or whether we will continue to languish in a wide trading range between the high and low 800's in the S&P 500 futures. As of Friday's close, new 20-day highs are above their late January levels, but well off the early January peak. Similarly, we are back to late January levels in Cumulative NYSE TICK (bottom chart), but off the early January level.

In sum, this is a Missouri market: I need to see the market bulls "show me" their hand by following strength with further strength. Continued strength in the Cumulative TICK line and continued expansion of 20-day new highs among stocks are two things I'll be looking for in this "show me" mode, as we see if the market can break above significant resistance in the low 900 area. Without such follow-through strength around our current level of trading, a fall back to the longer-term VWAP level of 839 in the ES futures would be a reasonable intermediate-term expectation.

As I've indicated in past posts, I use Relative Volume to gauge current market volatility and the odds of hitting the price targets that I post each morning via Twitter, along with updates of the above indicators (free RSS subscription). For those who track Relative Volume, here are the 30-minute median volume figures for the ES contract going back to early January. Standard deviations are in parentheses:

8:30 - 231,251 (60,713)
9:00 - 190,741 (48,962)
9:30 - 144,204 (54,835)
10:00 - 130,304 (35,418)
10:30 - 103,570 (37,202)
11:00 - 100,055 (44,439)
11:30 - 85,044 (35,845)
12 N - 104,466 (32,523)
12:30 - 115,163 (53,373)
1:00 - 125,341 (56,872)
1:30 - 132,304 (56,906)
2:00 - 170,241 (43,477)
2:30 - 229,581 (70,819)
3:00 (15 min period) - 92,726 (25,918)

Watch for early Monday morning Twitter posts for daily and weekly SPY price targets. If you don't subscribe to the free service, you can see the last five "tweets" on the blog page under "Twitter Trader". Have a great week trading.