Sunday, February 1, 2009

January Wrapup

January ended up on a sour note and it appears now that the weakness will carry over into the early part of February. The first chart is the SPX in multiple timeframes. All look like we can expect weakness for at least the next few days. In particular the 60 minute MACD is still strongly negative and needs at least a day to turn.

The SPX Weekly, Daily, 60 min and 10 min charts
Click to enlarge

The McClellan Oscillator reached into overbought territory and is now declining. While we are approaching the green trendline I doubt this will hold and we can expect the MCO to test the -200 level. This will create an oversold condition favorable for a reversal. The key factor is whether or not the 10% Index can manage to stay above the -500 level. Over the last week I have noticed that on declining days, the Advance-Decline numbers have remained a bit stronger than in the past. If this pattern holds in the next decline I would expect the 10% Index to stay above -500.

The McClellan Oscillator for 1-31-09
Click to enlarge

The HiLo Index is diverging from the price which is bullish. Given the recent market history, I don't see any way this can change. This makes the indicator a bit irrelevant for at least 10 more months. However the Percent of Stocks Above their Moving Averages (50 and 200 day) is giving us good information here. When the 50 Day Percent Index got into the upper overbought range, the market sold off. At the same time, the number of stocks above their 200 day average is sick and needs life support. The fact that the number of stocks above the 50 day average got up into the upper range indicates that we might see the 200 day Percent Above Index start to turn up reasonably soon.

HiLo Index and the Percent Above the 50 and 200 day averages.
Click to enlarge

Finally, here is a long term (all the available data) for the Percent Above Indicators for reference.

Historical view of Percent Avove
Click to enlarge

While I remain of the opinion that we can expect the SPX to test its 200 day moving average, the exact question is when. IF the markets can weather the upcoming decline, then I believe we will have established the correct conditions for a more sustained move higher. The key factor to watch is market breadth, if the Advance-Declines can hold up better than they have over the last 18 months, it will keep the 10% index above -500 and confirm a reversal. If not, we are back to square one.

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