David's Trade Journal

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David’s Weekly Market Chartmentary Sunday, May 29, 2005

(I’m writing this on the road. Please pardon the delay.)

Market in Topping Process

Generally speaking, free trade gains popularity as the economy expands, and protectionism becomes public sentiment as the economy constricts.

The “NO” vote by French people on the new EU Constitution expressed that public sentiment. Apparently, French people don’t want the type of economic and welfare reform that the business community wants. They don’t want it turn out to be just like America. France has 10% unemployment rate. And then, there’s Turkey, a Muslim majority country that was denied of their admission into the bloc of Christian counties union.

Whatever may happen to EU is yet to be seen. One thing we do know is that it would further Dollar’s uptrend and that the protectionism appears to be gaining momentum around the glob.

I posted a chart last week that showed the inverse correlation between the Dollar index and the stock market. One reason is that rising Dollar makes us less competitive in exports. Export of goods and services is part of our GDP. Higher Dollar does make imports relatively less expensive. While that may provide some relief on import oil and materials, oil price is not determined by just the currency valuation. It’s dictated by the law of supply and demand. With China also on the demand side of the equation for oil and with its currency pegged to the Dollar, any drastic decrease of oil price is not likely to occur.

And then we have the game of chicken going on between the US and China over international trade. The Anti-China protectionism sentiment has been gaining momentum of late. Trade war is no good for anyone. The tension between EU and China has also been mounting. Everything has to do with everything else in our relative universe. We have to be able to connect the dots and see the big picture. And, the big picture I’m seeing now concerns me.

The other concern is, again, the trading volume.

I think Michael Kahn, the technical analyst of the WSJ, hit it right on the head of the nail. He wrote: “It all comes back to supply and demand for stocks…,” and “Since volume did not increase with the current rally to date, we can deduce that it was a drop in supply, not an increase in public participation (demand) that was the culprit.”

The way I see it, a small number of stocks making large gains characterizes a weakening market. It gives the perception that the overall market is healthy, but in reality it’s not.

Here’s looking at the 2-week action of NASDAQ. Only 2 out of the past 10 trading sessions the volume had gone over 20-day moving average. The minor up day on Friday had the lowest volume. Not much was mentioned about them, but silver and gold were the No.1 & No. 2 industries that had the biggest intraday gains on Friday. It’s the precious metals, energy and utilities, etc. that kept the market afloat on Friday. Semiconductor dropped 0.7% on Friday. NASDAQ doesn’t go far without the tech sector leading the way, and the market doesn’t build momentum without NASDAQ charging ahead.



This next chart is similar to the TRIN indicator chart that I posted on my website on Thursday, with the addition of the McClellan Oscillator. Let’s take a look at the TRIN indicator first. When its 10-day moving average (blue line) reached that overbought territory of 0.90 and started to turn up, the market began to decline. The 10-day TRIN moving average stood at 0.88 on Friday and the little hook at the bottom might’ve indicated it’s ready to make its move up. The McClellan Oscillator may have confirmed just that.



Normally, McClellan’s overbought and oversold range is between 100 and -100. But, instead of going by the book, we must recognize the recent low trading volume and heed its relative movement and locations.

In any regard, you can see that McClellan Oscillator had attempted to break through 50 unsuccessfully. Now, after several failed attempts, 50 should hold as a strong overhead resistance. This implies that this is as “overbought” as it can be. Then, the path of least resistance is to decline from here.

We then have TRIN in the overbought territory of under 0.9, and McClellan seemed to have maxed out at the relative overbought territory of 50. It’s only logical that the market is due to fall from this overbought condition.

Incidentally, I’m not saying the market’s going to have the same 1929 type of crash. It’s hard to imagine having a crash of that magnitude without the extreme euphoric sentiment as it did in 1929. I’m referring to a near-term market correction based on the technical and the fundamental reasons.

Finally, many analysts believed that, with all its momentum, NASDAQ could hit 2100 before the commencement of its retreat. I don’t believe NAZ has to go to 2100 before retreating. It's as ready to come down now as ever.

This weekly chart shows that the current 2075 is as good a resistance as any level. In fact, there’s no resistance at 2100. Once it broke above this 2075-2080 level, it could go much higher than 2100. So, the question is whether the market is carrying sufficient momentum to achieve that. If not, then this is where it hit a snag.

In addition, ADX (Average Directional Index) line (thick black line) had already begun to trend downward. Wilder’s ADX is one of the best indicators that measured the strength of the current trend. Although the green +D (the positive Direction Indicator) had crossed above the red –D (the negative), the downturn of the ADX signals the weakening of the current uptrend.



Yes, the market’s topping out.