Tuesday, April 14, 2009

Indicator Update for April 14th

Last week's indicator review concluded that it was premature to fade the rally as long as the indicators were strengthening. We did get a mild pullback early in the week, but once again the lower prices found buyers and we closed last week on a strong note, with most sectors displaying an increasingly bullish trend. (Note: the charts above are updated for Monday's close). As the morning Twitter post noted, 28 of the 40 stocks that I track in my basket are currently trading in uptrends, 7 are neutral, and only 5 are in downtrends. Particularly noteworthy is the dramatic upside breakout in banking stocks ($BKX, bottom chart), which has been a market leader to the downside (during the decline) and now on the rebound.

A bullish pattern that I have been emphasizing for a while is that we're seeing the market stay at overbought levels in the Cumulative Demand/Supply Index (top chart), with pullbacks leading to higher price highs. What this means is that we have persistently strong upside momentum: many more stocks are closing above the volatility envelopes surrounding their short-term moving averages than closing below them. This persistence is only seen in bull swings; it was not present during the bounces during the market's decline.

Similarly, we're seeing consistently elevated levels of new 20-day highs versus new lows (middle chart). On Thursday, we registered 903 new 65-day highs against 57 lows, the highest level since September. This tells us that the market is strong on an intermediate-term basis and gaining strength over time.

Again, we're at those levels in the Cumulative DSI when pullbacks are common. Pullbacks that stay above last week's lows will keep the above bullish picture intact. Signs of problems for the bulls would be a notable increase in the number of stocks registering fresh 20-day lows and a reversal of the bullish sector themes noted recently (growth sectors outperforming defensive ones). I will be updating indicators via Twitter (free subscription) to keep tabs on developments during the week.