Sunday, February 21, 2010

Indicator Update for February 21st

Last week's indicator review observed that we had a bounce off momentum lows, but no resumption of bullish market action. That changed significantly this past week, as we failed to take out the prior week's lows and rallied higher through the week.

Sector Technical Strength (a proprietary, short-term measure of trending) turned bullish across most of the sectors (top chart), with notable week-over-week strength among Industrial, Materials, Consumer Discretionary, and Financial shares. Follow-through will be important to sustaining the upside trend; even relatively modest weakness would turn four of the eight sectors to neutral trending status.

We can also see the sharp advance in the Cumulative Demand/Supply Index (second chart from the top), which has rallied steadily from its lows. Such sharp rallies have historically led to further price strength 20-days out, as upside momentum in the Index typically precedes price peaks.

Our second chart from the bottom shows that 20-day new highs are once again handily outnumbering new lows; this in part reflects very solid strength among small cap issues. Despite early weakness on Friday owing to the Fed news, we registered a fresh weekly high in the number of shares making 20-day peaks. That indicator has not been losing steam.

Finally, the helpful chart from Decision Point at bottom shows that we've seen unusual recent advance/decline strength among the small cap issues comprising the S&P 600 Index. Indeed, the advance-decline line specific to the small caps is back near its bull highs. I would view a clear break of this indicator to new highs to be a bullish development.

In all, I am watching the indicators closely to see if we stall out and make a lower top around current levels vs. continue strength and test the bull highs across the major indexes. I emphasized in last week's review that we were seeing an intermediate-term correction in an ongoing bull market. This past week's action is consistent with that perspective.