Sunday, February 07, 2010

Indicator Update for February 7th

Last week's indicator review suggested that we were seeing an intermediate-term correction with weakening readings and bearish intermarket themes. That has continued to be the case over the past week, as we've retraced the market strength of 2009's fourth quarter.

Technical strength, you will recall, is a proprietary measure of short-term trending (top chart). Note how all eight S&P 500 sectors that I track are in bearish trending mode, with surprisingly little variation among them. Notice also how the sectors, as a whole have been in a bearish mode for the past three trading weeks. This highlights the intermediate-term correction noted in earlier indicator posts.

Demand/Supply is a short-term measure of momentum, tracking the proportion of NYSE, NASDAQ, and ASE stocks that close above vs. below the volatility envelopes surrounding their moving averages. It turns out that a cumulative sum of Demand/Supply (middle chart) serves as a useful overbought/oversold signal. We are clearly oversold, in territory that--in the recent past--has corresponded to intermediate term market bottom areas.

Finally, note the significant expansion of fresh 20-day lows on Friday to well over 3000. We also saw a very significant expansion of new 65-day lows before bouncing higher on Friday on meaningful volume. That sets Friday as a candidate momentum low day, which classically can be followed by subsequent tests of lows (typically with indicator and sector divergences). Should we set up such tests with those divergences, I would be strongly leaning toward buying this market. Until then, the weak indicators keep me from playing the long side for anything more than short-term bounces.