Monday, April 05, 2010

Indicator Update for April 5th

Last week's indicator review found that upside momentum had pulled back, but that little had changed from the prior week's bullish outlook. This past week has seen a continuation of this mode, as we reached fresh bull highs in the major stock market averages and new highs in the advance-decline line specific to NYSE common stocks.

Sector behavior continues to be solidly bullish (top chart), as assessed by the proprietary Technical Strength measure. Note that we've barely seen any bearish readings in Technical Strength over the past four trading weeks. Energy stocks showed the greatest gain in strength, on the heels of a strong oil market. We also saw gains among Materials shares, reflecting commodity strength. All sectors are in short-term bullish modes, with Technology stocks displaying weakness relative to the others.

As I mentioned recently, there are yellow caution signals for the bull, including diminished upside momentum and quite bullish sentiment. The weakened momentum is evident from the Cumulative Demand/Supply Index (middle chart), which nonetheless remains very modestly positive. Recall that this index tracks the cumulative number of stocks trading above vs. below their volatility envelopes; it tends to peak ahead of price, and this cycle appears to be no exception. As long as we see successive troughs in the Cumulative DSI at higher price levels, the longer-term trend of the market remains up.

Finally, we see that new 20-day highs vs. lows (bottom chart) have weakened noticeably as this rally has progressed. This is perhaps the greatest of the yellow lights that I'm seeing in the market: the rally is becoming more selective, not broadening. That typically precedes corrective action. Thursday saw over 500 new 20-day lows; a continued elevation of that number would make me particularly cautious about the upside.

In sum, it appears that we have an aging bull cycle within the larger bull market that began last year. As always, I'll be posting updates to the indicators each morning before the open via Twitter.