Indices End the Week with a Bang . . . or Did They?
By Linda Piazza
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Unlike Thursday's weak trading, Friday's trading saw most of the indices touch or exceed their daily R2 levels. The NDX and COMPX closed above their respective R2 levels, at or near their day's highs. Although the advances occurred on volume that might be deemed passable rather than strong, some blame for the lower relative volume should be attributed to the normal Friday volume slump.
Not only did most indices test their daily R2 levels, but most also closed above next week's pivots. For those interested in following daily, weekly, and monthly pivot analysis figures, I've included a matrix below. Note that the monthly numbers are Jeff's, copied from his matrix as those numbers will not have changed since he left for vacation.
Pivot Analysis Matrix
Indices that tested or exceeded daily R2 levels and closed above the next week's pivot levels: that's bullish. Friday's action felt bullish, too, at least for the first portion of the day before the afternoon ennui set in. Delving into the charts shows that the action might not have been as bullish as it appeared on the surface, however. I'm trying a top-down approach to this weekend's study, looking first at market internals, next studying the OEX's charts, and finally touching on the other indices.
Breadth was positive all day on Friday, with advancers almost three times decliners on the NYSE and more than twice decliners on the Nasdaq. Up/down volume patterns proved even stronger, and new highs/new lows ratios trumped those in bullishness. Lately, however, I've become worried by the imbalance seen in new highs/new lows figures. Late in the day on Friday, a reader inquired about charts on Stockcharts.com that might show new highs/new lows, piquing my interest. When I turned to a chart of the NYSE new highs/new lows ratios, this is what I saw:
NYSE New Highs/New Lows
This chart confirmed some of the worries I've had about the imbalances seen in the new highs/new lows figures on the NYSE in particular. Since I haven't previously studied these figures in chart format, I wondered whether I could be mistaken about the import of the spikes seen in the values. After all, a stock showing this pattern would have just broken out above resistance in a bullish pattern. However, I correlated the most recent value peaks with recent tops in the indices, and my worries were confirmed. The arrows I've placed above the most recent value peaks on the ratios show times when those peaks have occurred near or at market tops. I've also noted that the weekly RSI is the highest it's been in two years, and that the weekly 5(3)3 stochastics are showing bearish divergence.
Perhaps those values are the highest they've been in two years because we're coming out of a bear market and stock performances are improving. Perhaps my interpretation is 180 degrees wrong. Still, this chart alerts me that it may be time for a pullback in these new highs/new lows ratios. In this case at least, all may not be as bullish as it appears on the surface.
Most market participants this week were cheered by the steadiness of the markets after the recent rally. Is that what the charts show, too? Here's the OEX weekly chart.
OEX Weekly Chart:
Although the lines prove somewhat difficult to discern on this chart, I've included the 10-week and 30-week exponential moving averages. According to Martin Pring, a bullish or bearish cross of these averages can indicate a change in intermediate trend, although MA crosses sometimes occur late in the movement. This week, the 10-week has just completed a bullish cross of the 30-week. As Pring warns, this bullish crossover has occurred late in the movement. How late? So late that the movement is almost concluded?
The weekly ADX shows selling pressure (blue line) decreasing while buying pressure (orange line) increases, but the main line (pink) shows a less bullish aspect. It slopes down toward 20, indicating a weakening in the recent trend. The weekly candle, a doji sitting at the apex of the rising wedge and just above the long-term descending trendline, also depicts the weakening of the trend. The steadiness seen in the markets this week produced that doji, but a doji indicates something other than steadiness. It indicates indecision, and is sometimes a reversal signal. That reversal signal would need to be confirmed by an OEX move down next week. Without that confirmation, the doji shows only a natural hesitation near important resistance as the index gathers strength. The flattening 5(3)3 stochastics and RSI near or in levels that indicate overbought conditions do hint that a reversal could be near, however.
Because the ADX level remains above 20, although barely so, it may be possible that rollovers in the oscillators will accompany consolidation rather than a pullback. Oscillators can stay in overbought territory for a long time, too, but these indicators hint that the risk is shifting toward those with bullish positions. While I think it possible that the OEX might still push up toward 487, the top of the 385-487 trading range, its failure to sustain a move over 475 this week makes me more doubtful of that happening. That failure to move over 475 gives more credence to the idea that the OEX may turn down at or ahead of that 487 number, remaining within its trading range.
As seen on the OEX weekly chart, steadiness may not have been particularly bullish. Perhaps the daily chart shows something different.
OEX Daily Chart:
Although I've begun to question the relevance of the rising wedge on the daily chart since prices have moved into the apex, a couple of factors encouraged me to retain it for another week. One factor can be found in an examination of the RSI and 21(3)3 stochastics, pinned until late this week in their own triangular formations. Just as the OEX broke down out of the rising green wedge, these oscillators also broke below their own rising support lines, giving confirmation of the breakdown in the OEX price chart. Prices rose today to test the underside of that green rising wedge, finding support first on the lavender line that a reader proposed as an alternate lower trendline for the rising wedge. A retest of broken support is natural and expected. Although it's difficult to see on the chart, the RSI rises again, too, to test its own broken support. It's possible that the OEX retest could be successful, but the breakdown confirmation given by these two indicators hints otherwise.
ADX may tell a different story, although a few hints of impending weakness may be showing up in that indicator, too. Selling pressure declined through mid-April and has since remained steady, but has not risen. The ADX number remains firmly above 20, indicating that the trend is still in place. Buying pressure appears to be receding, however, and the ADX line may be flattening. Selling pressure could pick up if the OEX breaks firmly below the lavender line of the rising wedge, and especially if the OEX breaks 462.75, the site of recent support. A break beneath that support would almost certainly mean a retest of the converging 21-dma and exponential 200-dma at 460.56 and 459.54, respectively. A failure there would find next light support near 456, with support layered beneath that in close succession. It's difficult to predict now how deep a pullback would be without first watching the speed with which the oscillators cycle back down toward oversold levels. On a P&F measure, at least, no real damage would be done until a trade beneath 440, and it's impossible to judge now whether a pullback could take the OEX below 440.
Stockcharts.com shows the bullish percent level for the OEX ($BPOEX) at 65. A scan of the P&F chart shows that the OEX bullish percent has topped out as high as 79 or as low as 59 in recent years. This measure, too, then shows that while the OEX can continue the rally, risk begins to shift toward those in bullish positions.
Before looking at the chart of the DJI, it might be instructive to view its sister index, the Dow Jones Transportation Index.
Weekly Chart of the Dow Jones Transportation Index:
The transports have had a great run, with this index leading the Dow Jones Industrials in crossing above its 200-dma. I've included a 40-week MA as an approximation of the 200-dma. I've also snapped a Fibonacci retracement tool on the chart. This shows that this week's doji formed approximately (because I snapped the tool and didn't calculate exact amounts) at the 50% retracement of the March '02 to March '03 move. Most rallies retrace 1/3 to 2/3 of the previous decline, according to Pring, with a 50% retracement being a common amount. This week's doji formed at important resistance, then, giving its formation extra significance. RSI and 21(3)3 stochastics also have moved into levels indicating overbought conditions. Although it's difficult to see on this chart, RSI has flattened, but has not yet turned down, and the stochastics still point upward. The 5(3)3 stochastics (not shown) have made a bearish kiss, however.
Daily ADX has begun to slope down, indicating a weakening in the trend. Buying pressure has slightly flattened but selling pressure still declines, too. It may be time for the transports to pull back or consolidate while the recent gains are digested, and I wouldn't be surprised to see that happen next week. A pullback to next support near 2420 or even to the 38.2% retracement level pictured near 2360 would preserve the bullish outlook, but I would watch the behavior of the indicators to gauge whether the overbought pressure is quickly released or requires a deeper plunge.
The transports often lead the Dow Jones Industrials, but the two should eventual confirm each other. Because Q-charts printed strange candles on my DJI chart, I've substituted a Stockcharts.com chart for the DJI.
Daily Chart of the DJI:
The daily chart shows that the DJI trades safely within an upward slanting regression channel, with today's movement bringing the price right up to the midline of that channel. The DJI could pull back to 8430 or so and remain safely within that channel. Bulls will also consider it a victory that the index closed the week over 8600 and made a higher high relative to the March 21 high.
The weekly chart (not shown), however, reveals a small-bodied weekly candle that could also be indicative of indecision. Daily ADX (not shown) slopes down, indicating a weakening of the trend. As shown above, daily RSI, usually one of my favorite indicators, appears somewhat inconclusive, oscillating between 50 and 70. However, a trend of lower RSI highs can be pitted against the DJI's trend of higher highs, showing bearish divergence. Stochastics also show this bearish divergence. Although ADX slopes down, it's not yet below 20, so it's still possible that oscillator evidence can not be trusted.
Stockcharts.com lists the bullish percent for the industrials ($BPINDU) at 66.67. $BPINDU has topped out as high as 80 and as low as 60 in recent years, so risk with this index also shifts toward those in bullish positions, although the bullish percent levels can still move higher.
The weekly chart of the NDX shows a doji forming at resistance, just as was seen with the OEX chart. Weekly oscillators are at levels indicating overbought conditions but have not yet turned down. Bullish percent for the NDX ($BPNDX) now measures 78, with $BPNDX levels topping out as high as 82 and as low as 50 in recent years. As with the other indices, the bullish percent levels still have room to rise, but this evidence, coupled with the doji on the weekly chart, indicate the shift in risk to those with bullish positions.
The daily chart proves somewhat more difficult to decipher.
Daily chart of the NDX:
A glance at the horizontal red lines drawn across the RSI and stochastics tops shows possible bearish divergence setting up, with the NDX making a series of higher highs while those indicators make equal highs. Yet, those same indicators show a pattern of higher lows, a pattern that has not yet been broken. In fact, RSI appeared to turn back up as it approached that ascending trendline.
ADX has flattened and buying pressure may have done so, too, but selling pressure does not appear to have increased and may not as long as the NDX stays above the 1100 support. A move below that level would probably increase selling by disappointed bulls, however. Although the oscillators' directions may be difficult to discern on this small chart, stochastics have turned down, indicating that it's time to test the consolidation-or-pullback and how-deep-a-pullback theories. As with the other indices, it will be important to watch the speed with which the indicators move back toward oversold levels as the NDX consolidates or pulls back.
Other indices of interest are the BIX, perhaps turning down again from the 296-297 level that has retarded advances since September; and the SOX, clawing its way back above 350 by the week's close, although not able to regain the week's high. The SOX daily chart shows definite bearish divergence with oscillators making lower highs while the price made a higher high. The SOX daily RSI shows that same pattern of higher lows that has shown up on other charts, and those higher lows have not been violated in the SOX's case. The same pattern shows up on the BIX daily chart, but in this index's case, the RSI violated that ascending trendline formed from its higher lows.
All the gathered evidence shows that it's time for a pullback or consolidation. Across the indices, ADX levels slope down, indicating a weakening in the recent upward trends. None of those ADX levels are yet below 20 however, indicating that it's still possible that the rounding-over oscillators predict consolidation or a light pullback rather than deeper pullbacks. Rolling-over weekly oscillators hint that added pressure will be given to the pullbacks, but that's not certain yet. In my opinion, we'll have to watch the behavior of the oscillators while price consolidates or pulls back to gauge what happens next. My study of global markets gives me an opinion of what might happen, but the charts themselves do not necessarily back up my opinion.
That's the overview, but what will happen Monday? Hourly oscillators all approach overbought levels or have begun turning down from those levels, but the movements are tentative as yet so that it's possible that they can be turned back up as indices consolidate or build on gains for another day or so. If those gains bump the indices above important levels, momentum could carry them even further, as bullish percent levels could still rise higher. Much depends on the behavior of the foreign markets on Monday. The Nikkei has been volatile, making big percentage moves, as has the DAX. Both the Japanese and Germany economies are fragile, teetering on the edge of or already dipping into another recession. Germany's index of leading indicators fell below 50 this week, indicating that it's headed into a contraction in its economy. These and other global bourses have been feeding off our gains, as we have been theirs, and a blink from any of these indices could impact them all.
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