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Index Wrap

New Highs

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The Dow and SPX closed Friday at their highest levels since May 2002, with the Dow closing above 10K on a very light volume day. A feeble 1.21B NYSE shares and 1.46B Nasdaq shares were traded, marring the otherwise bullish picture. The Dow added 34 points or .3% to close at 10,042, adding 1.8% for the week and bringing its yearly gain to 20.4%. The Nasdaq closed higher by 6.68 points or .3% at 1949, up .6% for the week and 45.9% for the year. The S&P 500 was up 2.93 points to 1074.14, a .3% daily gain, 1.2% weekly gain and 22.1% YTD gain.

Noteworthy in the above statistics is that the Dow has been leading to the upside, fueling speculation that the markets are being supported by the index covering the smallest number of stocks. Whatever the reason, the Dow has been playing catchup to the Nasdaq for the past week, leading consistently to the upside and pulling back very shallowly even when the Nasdaq dived. The Nasdaq broke below its rising lower bear wedge trendline for the first time since the March lows, but bounced to close just above it.

Volatility returned to its low range, with prints below 16 for the VXO on an intraday basis. The cycles we follow became very extended, and the Dow's first break of the technically dubious but psychologically significant Dow 10K prompted the expected cheering and lofty proclamations from those voices that tend to herald the very extreme ends of market moves. An excellent anecdotal indicator, the famous "shoeshine boy tipster", is becoming overbought, with the non-financial press reporting on the banner number in big bold letters. The only question is how far the punch will go before the bowl runs dry.

The Fed, once again turning a blind eye to new 7 year highs in the CRB, gold, silver, and strong gains in the prices of all assets but the dollar, reignited speculation that another tidal wave of Fed-sponsored liquidity would be unleashed to combat the "low inflation" that the governors continue to claim they somehow see. Bonds were bought, equities were bought, miners, drillers and foreign currencies were bought. In other words, the dollar was sold.

On a technical basis, the indices squeezed higher within their ongoing cycle configurations and chart patterns. Nothing appears to have changed, except that the Nasdaq's bounce from its intraweek lows took the shape of a doji hammer, a reversal pattern that can portend higher highs to come. THE question will be whether the Dow gets a lift from Nasdaq strength next week, or whether it has already spent its energy. Cracks in the foundation, such as continuing lows from WMT, support the bearish interpretation, but the matter can be argued convincingly both ways. The market will have to judge.

Weekly COMPX candles

The Naz wanted to break down this week, fulfilling last week's gravestone doji top to a "t". This week's bounce doji portends upside to come, and the combination of the two portend uncertainty and possibly rangebound chop. The herd ran up and found an absence of bidders, then ran south and found an absence of sellers. Meanwhile, the weekly cycle rolled lower, and given the steep bearish rising wedge into which price has been compressing, the COMPX is not the most inspiring of bullish charts. A closing break below 1900 or above 2075 will resolve the deadlock, but the odds favor the former over the latter.

Weekly INDU candles

Compared to the COMPX, the Dow was on fire. The only challenge to the bearish rising wedge was to the upside, with the upper rising trendline holding back the advance. A gap up on Monday would suggest a test of Dow 10,600, which incidentally is the level at which I sold my last Dow position in 2002. I would view any such move as a throwover such as we've seen repeatedly in our charts at the apex of rising and descending wedges this year, but for the time being, this week's action was clearly bullish. Even the weekly cycle oscillators, still bearishly diverging, twitched back up, and more upside will extend them back into trending territory.

Daily OEX candles

The OEX ground out a new high, catching many traders by surprise on the heels of what on Wednesday appeared to be a perfectly priced, perfectly timed cycle rollover. The daily cycle remains in an upphase, and the 525 level which had provided such strong resistance should now serve as equally compelling support. 533 is now trendline resistance.

20 day 30 minute chart of the OEX

The 30 minute cycle oscillators have been negatively diverging from the bulk of the post-Wednesday bounce, and given the wedge-like appearance of that latter leg of the climb, all does not appear well in paradise. However, as noted in the Futures Wrap, the type of buying that I expect to come in at the top is not concerned with technical or risk-analysis. The patterns set up thus far should bear little relation to the type of hysteria buying that might be prompted by an aggressive, permanently bullish financial press. Remember the COMPX in March 2000, with Maria repeating "a new record" like a mantra? There's simply no telling how far such a blowoff can go before it tops, and for this reason our cyclical and price analyses are of only secondary predictive utility. Look for resistance at 532, then 533, with support at 529, followed by 525.

Daily QQQ candles

The Qubes, on the other hand, look like an accident waiting to happen. There is a huge, extended bearish oscillator divergence refuting the autumn climb, and the 10 day stochastic is in a downphase that has so far only twitched in response to the post-Wednesday bounce. Resistance is 35.50 followed by 36, support at 33.70, followed 33.

20 day 30 minute chart of the QQQ

We will find out on Monday whether there's a reverse head and shoulders neckline at 35.40 or not. If so, 36.60 is the implied target, as difficult as that price is to imagine. 36- 36.20 has so far been a brick wall. On the bullish side, however, the 30 minute cycle downphase truncated from a higher oscillator high, and could be tipping the hand of a very bullish bid below the surface.

Cyclically, we have the weekly cycles topping on the Dow and rolling over tentatively on the Nasdaq, the daily cycle upphasing but running out of time on the Dow/OEX and downphasing on the COMPX/QQQ, while the 30 minute cycles have flipped back to upphases. If that 30 minute upphase has legs, it should extend the daily OEX in a potentially terminal move, while possibly aborting the Nasdaq's downphase. The strength and duration of Monday's buying will be critical. It is also unpredictable, and for this reason, both bulls and bears should keep their entries on very tight leashes.

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