Monday, March 23, 2009

Indicator Update for March 23rd

Last week's indicator review noted, "As long as the indicators remain strong, it's premature to fade market strength; as long as we see lower price highs and lower price lows during successive peaks and valleys in the indicators, it's premature to conclude that the bear market is over." We did, indeed, see further strength in the indicators during the week before a selloff late in the week. Nonetheless, as we can see clearly in the Cumulative Demand/Supply Index (top chart), we're hitting overbought levels at successively lower price highs, consistent with bear market dynamics.

That doesn't mean that a bull move cannot continue for a while here, as we had some extended upside action following the November lows. If that is to happen, a common pattern is for pullbacks in the Cumulative DSI to occur with relatively modest price corrections, such that new upthrusts in the DSI occur at higher price levels. Such a scenario should lead us to take out the 800 area resistance in the S&P 500 Index during the coming week.

Given the neutral trend status across most sectors, I'm currently viewing the S&P 500 Index in a range defined by the Wednesday and Friday lows (around 761) and those 800 area highs. Note that new 20-day highs expanded nicely on the week following the Fed announcement (middle chart); on strength, I will be looking for indications that we can expand those new highs to sustain the uptrend. Conversely, weakness in the Demand/Supply numbers (posted each morning prior to the open via Twitter), will suggest difficulty in sustaining a move above that range and a likely test of the lower end.

The Cumulative TICK (bottom chart) also expanded during the early portion of the week; I'll be looking for new highs in that indicator to confirm any price strength. Weakness that takes us below the Friday readings will likely have us testing that lower end of the trading range.

In sum, I would not be surprised to see consolidation following the strong price rise off the early March lows. That consolidation should be relatively flat if we're going to sustain another leg upward. A deeper correction, particularly one that takes out that 761 support area, would have me thinking about a bottoming process and eventual test of bear lows.

Later today, I'll be posting relative volume norms for the ES contract to help traders gauge likely volatility and participation in market moves. Intraday updates regarding volume patterns will also appear via Twitter (free subscription).