Today's trading proved to be choppy ahead of the important economic numbers to be released tomorrow and Friday. Jeff returns tomorrow morning from his vacation, just in time to deal with the impact of those numbers on market behavior and psychology. We all look forward to reading his input.
A demonstration of the day's trading action with respect to pivot analysis can be found in an examination of the DJI's behavior surrounding pivot points Jonathan calculated for last night's Index Wrap. Today, the DJI opened at 8673.20, just below the daily pivot and just above the weekly R1. That first five-minute candle moved the DJI all the way above the daily R1 level to the day's high of 8728.10, but the next 11 five-minute candles saw the DJI plummet through the daily pivot, the weekly R1, the daily S1, and stop just short of the daily S2. Hitting the S2 bounced the DJI back up through S1, almost all the way back to the weekly R1, where it turned around and headed back to the daily S2. The DJI again bounced, headed up through S1 again, but once again stopped short of the weekly R1, posting a lower high and preventing the DJI from confirming a double-bottom pattern on the intraday chart. This time, S1 provided a bounce, but it didn't carry the DJI far, with the closing price ending at 8647.80. Whew!
Trading on the Nasdaq and S&P's was much like that on the DJI, but for all that choppiness and testing of support levels, markets closed flat, barely dropping on the day. Here's a pivot analysis matrix for tomorrow, listing daily, weekly, and monthly numbers. The daily and weekly numbers were computed using Q-charts figures. As I mentioned this weekend, the monthly values are Jeff's, copied from his matrix since those monthly numbers have not changed since he left for vacation.
Pivot Analysis Matrix
As I did this weekend, I thought I'd begin by taking a look at market internals, then studying the OEX, and broadening the study to a brief discussion of the other indices. One study of market internals must include a look at the bullish percents. At the time this article was completed, Stockcharts.com had not yet updated the bullish percent charts for today, but yesterday's values showed the $BPOEX at 65, $BPINDU at 66.67, and $BPNDX at 79. While the $BPNDX had increased by 1 point, the other two levels had not been increased by the week's trading, nor had the values reversed into column's of O's. However, viewing the charts as line charts demonstrated that on both the $BPNDX and $BPOEX, the RSI and MACD are flattening, echoing the slight flattening seen in the value line. While this flattening is not conclusive evidence of an imminent downturn in the bullish percent values for the OEX, it does bear watching for bulls who want to manage risk and refine their plans for taking profits.
Line Chart of the $BPOEX
Other breadth measures include volume patterns. Today continued the recent pattern of new highs vastly outnumbering new lows. This weekend, I posted a chart of the $NYHLR, the NYSE New High/Low Ratio. That chart showed overbought levels on the weekly RSI. The weekly stochastics demonstrated bearish divergence with the ratio values. Although Stockcharts.com has also not updated this chart today, the chart does include the first two days of the week, and demonstrates that reversals have begun. The unannotated blue arrows pinpoint recent market tops, coinciding with tops in the $NYHLR.
Weekly Chart of the $NYHLR
As I mentioned in this weekend's wrap, I'm not accustomed to watching this measure in chart format, but I had been worried by the recent imbalance seen in new highs and new lows and worried that the imbalance might be a contrarian indicator. My study of the chart showed correlations with peaks in the $NYHLR and recent peaks in the markets, so the reversal signal shown above, if it continues to form during the week, also hints that the markets may be nearing a top. Two measures, then--bullish percents and reversal signals in the $NYHLR--warn bullish players that risk may be shifting onto their shoulders, allowing them to fine tune exit or profit-taking plans.
A study of the OEX weekly chart shows that although the weekly oscillators have not yet begun to roll, the upward trend continues to lose strength.
Weekly Chart of the OEX
The rising wedge is probably moot because prices have now risen into the apex of this formation. However, I continue to include it on my charts because those lines have nevertheless provided resistance or bounce points on daily or hourly charts.
This weekly OEX chart shows oscillators that are far into overbought territory, but not yet turning down. The 10-week still retains its bullish cross of the 30-week moving average. However, ADX continues its strong move down and now barely registers over 20, indicating that the OEX rally continues to lose strength as it approaches the top of the 385-487 trading band that has contained its movements since July of last year.
ADX looks different on the daily OEX chart, as it did this weekend. Although buying pressure appears to be decreasing, selling pressure is not yet increasing and will probably require a move below 470 and perhaps below 465 before it does so.
Daily OEX Chart
As I mentioned this weekend, several factors on this chart led me to retain that rising wedge formation. Those factors included the RSI and 21(3)3 stochastics breaks below their supporting trendline, hinting at a break of the rising wedge, too. RSI and both intervals of stochastics depicted reside in or near overbought levels, with the RSI appearing to turn down and the fast lines of both stochastics hinging down. The RSI makes a pattern of lower highs while the OEX makes higher highs. These oscillators hint at impending weakness, but the signs are tentative as yet, and the ADX level tells us that rally trend may still be active. Oscillators do not give clear sell signals when a rally is active.
The oscillators and chart formations on the OEX chart hint that the OEX might take yet one more run at 480 or even 487 if tomorrow's economic numbers do not swamp bullish sentiment.
Hourly OEX Chart
Hourly ADX shows that buying pressure still decreases, while selling pressure is not yet increasing, a trend seen across many charts. Today's action saw two possible chart formations setting up. One is a broadening formation, with a flat top just under 480 and with a broadening lower support line. The other is a potential bull-flag pattern. Both are marked on the chart. Each could be an accumulation pattern with a bullish tenor. The OEX ended the day with an attempt at an upside breakout of the bull-flag pattern. Although the doji that ended the day was just above the upper trendline of the potential bull-flag formation, I would not consider the breakout confirmed until a move over the 21-dma, since the OEX spend most of the afternoon trapped between that 21-dma and the 50-dma, just below its current position. Only extremely aggressive traders using risk capital only should consider buying an upside breakout of such a pattern anyway, with opex week upon us, strong resistance at 480, stronger resistance above that, and bullish percent levels creeping up. If there is an upside breakout, traders might consider waiting for tests of those next resistance levels at which point a bearish position might be a better bet. A breakout over OEX 480 might usher in a new wave of buying, but weekly candlestick patterns, growing bullish percent levels, and oscillator evidence hints that the 487 resistance might hold.
Assuming that the OEX resistance and other index resistance holds and markets pull back, how deep can we expect the retracement to be? That depends. If we're still in a bear market, the retracement (down) will be in the direction of the primary trend (down). Anyone who has studied physics understands that a wave can be amplified when new impulses are synchronized with the wave's movements. A child will swing higher when the parent pushes the swing in rhythm with the child's pumping, but the child will slow if the two impulses are not in synchronization.
However, according to another bit of traditional wisdom, this retracement might not be so deep. That's because the March-to-present movement has already retraced almost all of the December-to-March movement. The bigger a reaction movement is, the smaller the next retracement will be according to Martin Pring, author of several books on technical analysis. That would predict a retracement of the 38.2-50% magnitude rather than a deeper one.
For the OEX, a 38.2% retracement of the current move would bring the OEX to the 449 level while a 50% retracement would take the index just below 440. Therefore, traders who elect to enter a bearish play near 480 or 487, or on a breakdown below a key support level should keep those levels in mind as possible targets, always watching the oscillators. Oscillators that move down quickly on minimal price movements may be signaling that consolidation or a light pullback is in store rather than a deeper pullback, even to the minimal 38.2% retracement level. The OEX would find support in roughly 5-point intervals all the way down to those levels, too. The 200-ema just above 460 would be a level that would require a guarding of any accumulated bearish profits.
A study of other indices would not be complete without a mention of the $SOX (down 3.20 or .90%), the BIX (down 1.05 or .35%), or the $TRAN (down 19.28 or 0.78%). The SOX dipped below the key 350 level, all the way to 346.44, but managed to reclaim that level by the day's end, closing at 352.53. Daily MACD remains flat. RSI turns down while still remaining above the supporting line of RSI higher lows. ADX shows buying pressure decreasing while selling pressure is not yet increasing. Stochastics look toppy.
The BIX remains within the recent consolidation range, but now clings to the bottom supporting line of its ascending recession channel. The last three daily candles have printed a large white candle, a doji, and then today's spinning top candle, all just below the important 296-297 resistance. Taken together, these might be given a bearish connotation, but they may signal nothing more than a continuation in the recent consolidation.
This weekend, I included a weekly chart of the Dow Jones Transportation Index, showing that the $TRAN had printed a potential reversal signal at the 50% retracement of the March, 2002-to-March, 2003 move. The following chart shows what's happened this week.
Dow Jones Transportation Index:
This chart shows a flattening in the stochastics as the $TRAN turns down from that 50% retracement. ADX flattens, too, showing a weakening of the upward trend.
A weakening in the $TRAN might portend a weakening in its sister index, the Dow Jones Industrials, too.
Daily Chart of the DJI
This daily chart shows a continued weakening in the ADX, with selling pressure and buying pressure both flattening as the DJI moves within an upward regression channel that's fast approaching Jim's resistance line near 8700 (not depicted). Oscillators do not give give evidence as to the immediacy or depth of any downturn. RSI and both stochastics depicted have flattened while prices continue to climb, indicating bearish divergence, but not indicating when a downturn might occur. As I mentioned this weekend and as others have mentioned, the DJI could fall just below 8500 and still preserve the bullish outlook. A deeper fall might damage investor sentiment and sent the DJI back toward 8100, where it would next find strong support or toward 8000 on a deeper pullback. To gain insight into the expected depth of a move, watch oscillator behavior as the DJI retraces. A move above 8700 might indicate that the DJI would see another leg up, first testing 8850 resistance and then the stronger resistance at 9000.
Jonathan studies the NDX, QQQ, and COMPX and will cover these in his Market Wrap this evening and this article is becoming chart-heavy, so I'll touch only on the oscillator evidence on the NDX. While the NDX appears to have stalled under 1167 resistance, RSI, a leading indicator, turns down, and stochastics look rather like those on the OEX, with fast lines hinging but not yet in full bearish roll. Daily ADX shows a puzzling degree of strength in the trend, but buying pressure appears to be dipping while selling pressure remains minimal. A pullback to 1100 would still preserve the bullish cast of this chart, but a deeper pullback might damage investor sentiment. Watch oscillator evidence on any pullback to gauge whether overbought pressure will be thrown off by consolidation or a minor pullback, or will require a deeper pullback.
Although this week has already seen the release of economic numbers, including this morning's worse-than-expected retail sales figures, the real effect will begin to be seen tomorrow morning. It's been my opinion that hourly charts show that another swing up can not be ruled out, and that it's probably too soon to predict how deep a pullback might be. Martin Pring's teachings advise that the pullback might be a minor one. If pullbacks deepen, however, along with a reversal in the bullish percents, the recent bullish sentiment might be damaged. That might bring in more sellers and affirm the continuation in the bear market.