S&P 500 & Nasdaq Analysis and Trends

[Chris McConnel]

The Chartist
Going Down Makes Going Up More Likely
By Helene Meisler
Special to RealMoney.com

5/19/2004 9:29 AM EDT
URL: http://www.thestreet.com/p/rmoney/chartistrm/10161087.html

Technical Analysis
• Another lethargic rally means we're closer to a tradable rally.
• Stocks seem tired of going down.
• Nevertheless, this is not a bull market.

It seemed to take forever, but here we are at midweek. And instead of going down further Tuesday, we rallied. It was the same sort of lethargic rally we've seen lately, with low volume and boredom the themes of the day.

And since the closing bell we've received some good news and some bad news. I don't think it matters much if the market goes lower, as I go back to what I said Monday: If we go down, we are closer to a rally than another leg lower. I will once again review the indicators I showed on Monday, but today I'll add a few more to the case for a rally.

First, the oscillator is currently oversold. If we have a down day today it will go down some more, but by Thursday I believe it cannot go down anymore: On Thursday, the NYSE "drops" (on its 10-day moving average) three days of negative readings: -2,085, -2,881 and -2,746.

It's hard to imagine readings worse than these, and if we get positive readings, then the oscillator will rise forcefully. And although the S&P 500 and the Dow Jones Industrial Average did not make lower lows on Monday, the Nasdaq Composite did. That oscillator is well off its recent low, so it gave us a positive divergence.





Then there's the 30-day moving average of the advance/decline line. Beginning today, it is oversold on the Nasdaq. If you squint you can see that it turned higher Tuesday on the NYSE. And when we get the 10-day and the 30-day moving averages moving in the same direction, it helps the market move in that direction with more ease.





As long as we're discussing the indicators related to breadth, I should point out that the McClellan Summation Indexes are much closer to turning higher. They haven't turned yet, and maybe anticipating their turn is too optimistic of me, but it will now take a +800 net differential on the up volume minus the down volume on the Nasdaq to turn this indicator, and on the NYSE it will take a +1,800 reading (the NYSE uses the A/D, not the volume figures). Such numbers aren't that far off: One week ago the NYSE required a +6,100 differential and the Nasdaq required a +2,000 number, so we've come a long way despite the market being down this past week, not up.





There is also the number of stocks making new lows. They continue to contract, not expand, and that is a sign that stocks are tired of going down.





I see now everyone is discussing the put/call ratio's meteoric rise, but here it is in graphic form. It will stop rising and head lower on Thursday, once again pointing toward the midweek time frame.



And there's no denying that volume stinks. But maybe we should view it as upside volume as a percentage of total volume. Plotted on a 30-day moving average, it is now at 42%. A reading near 40% is typically associated with some sort of low in the market. Once again, if the market comes down today, it will only make this indicator better, not worse.



I am not one of those people you see on TV constantly who say this is a buying opportunity, so please don't take this as a bull market call. Instead, the indicators say we are closer to some sort of tradable rally than a major collapse. I still think the underlying trend has changed and this rally will ultimately fail, but it seems there is a better selling opportunity out there, not here.