Friday was a light volume, narrow range session for equities, with the indices closing flat following Thursday's break to new 52 week highs. The Nasdaq closed higher by 3, the Dow lower by 5 and the S&P lower by .67.
Last week saw significant declines in the US Dollar Index and in treasuries, but to bears' surprise and dismay, this weakness did not find its way to equities. What had begun as the suggestion of a daily chart oscillator upphase one week ago strengthened this week. In the attempt to get a clearer view on the different market phases in different timeframes, I've reviewed the monthly and weekly INDU and COMPX charts, and then for trading purposes focused in on the daily and 30 minute OEX and QQQ charts. In analyzing these different timeframes, I treat the Dow and OEX as rough equivalents, as with the COMPX and QQQ. This is an imperfect methodology, but it gets us easily close enough to develop an informed picture of the short, medium and long term prospects of the primary equity index trading vehicles, the OEX and QQQ.
Monthly COMPX candles
The ten year monthly Nasdaq chart is a sight to behold, as is the rally from the March 2003 lows. On this long timeframe, we see an ongoing oscillator upphase, indicating a long term bias toward higher highs for this year, but bumping up against Bollinger band resistance.
Before zooming in on the weekly candles, it's worth noting some factors about long term charts. On the above chart, one month equals one candle, and minor moves are insignificant. Moving averages, and their derivative oscillators, including Bollinger bands, are subject to significant lag due to the nature of their computation. A 21 month moving average is computing what occurred last year in arriving at this month's value. For this reason, the monthly charts and oscillators are useful only for broad context. Few, if any, are the traders who key off a monthly chart- imagine trying to select a stop loss!
Weekly COMPX candles
The weekly candle chart of the COMPX shows the rise off the March lows resolving itself in a bear wedge projecting potentially back to those lows at 1260. The weekly oscillators are very toppy, with the 10 week stochastic twitching up within its downphase, still on a bearish divergence against the higher highs being printed since the summer. The laggier MACD has not rolled over, but is clearly in nosebleed territory. While a price uptrend must be respected, the weekly COMPX has significant resistance overhead and appears to be much closer to a top than to a bottom.
Monthly INDU candles
The 10-year INDU is declining from the 2000 highs in an expanding wedge, with this month's price just below trendline resistance at 9800, coincident with Fibonacci resistance at that level. The oscillators are in an upphase off the March 2003 lows.
The weekly INDU below is also rising in a bearish ascending wedge whose downside projection is the 7400 March low. The oscillator configuration on this timeframe is similar to that on the COMPX, except that this week's bounce wasn't as strong. The MACD is in a bearish kiss, and the 10-week stochastic hasn't twitched up as vigorously as that on the COMPX.
Weekly INDU candles
On to the short term charts:
Daily OEX candles
The daily OEX is a difficult chart to read because it's gone virtually nowhere since June. The slight upslope it depicts from the summer has resulted in minor gains, and this has not been an easy range to trade. If I were holding untold fortunes of OEX securities and needed to sell them, the range since June would be an excellent range to allow me to liquidate at relatively stable prices. Bulls will see a consolidation range where I see distribution, but this is what makes a market. In the meantime, the move off the bottom of the range last week has produced an upphase on the daily chart oscillators, and it's this upphase that has fueled the uptick seen on the longer term weekly chart oscillators above.
Up-trending support on the daily chart is currently at 518, resistance just north of 525.
On the 30-minute chart below, the OEX is in a weak, uncertain stochastic upphase that failed to even register on the MACD. The MACD is sporting a bearish divergence, with lower highs against higher price during the same period. The bulloney bullhorn broke south, as bullhorns are wont to do, and is tracing a weakening pattern that resembles a secondary bullhorn. It could also be a hunchback head and shoulders formation, but in either case, it doesn't look bullish. Support here is at or just below 518, resistance at the rally high.
20 day 30 minute chart of the OEX
Putting it all together on the OEX, we have the month chart oscillators in up phases, the weekly topped out and trying to turn down, and the daily in an upphase. The 30-minute chart looks weak, both in price and on the oscillators. Given this mixed picture, both bulls and bears have plenty upon which to base their respective arguments. If the short term weakness can overcome the rising daily upphase, then a more significant decline can begin. However, so long as the daily remains on buy signals, bears will have to watch over their shoulders. These are currently conditions for continued rangebound chop, until one of the cycles shows some dominance over the others. Until it does, it remains a market for nimble traders only, gaming off the short intraday oscillators, the 30 minute and the daily.
Daily QQQ candles
The setup is identical for QQQ. Support is at 34.80, resistance at the rally highs. Note that on the 30 minute chart, the oscillator bounce is higher than on the OEX. This could be attributable to the beating received by GE for Friday's earnings report, but either way, the two indices are diverging. The NDX / QQQ tend to lead their peers, and if so, the OEX should pick up on Monday. Nevertheless, QQQ is rising in a weakening pattern on the 30 minute chart, with the same bearish divergence on the MACD.
20 day 30 minute chart of the QQQ
For next week, I expect the Qubes and OEX to continue to advance uncertainly so long as the daily oscillator upphase plays out. The indices gained this week, but witness the sharp, violent selloff from Thursday's highs. While the price advances are obviously bullish, the uncertainty below the surface is attributable to the weekly chart oscillator downphases. The markets are extended here, but can continue to grow more extended before they correct. The prescription is to take profits on the long side quickly, and to trail your stops on shorts enter on bounces.