Technical Update of the U.S. Markets

NOTE:  This Trading alert was originally posted at Ritholtz Research & Analytics on Thu 8/21/2006 11:50 APM EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location on the blog.

Are Markets digesting last week’s gains, or have they simply run out of gas?

The answer to these shorter-term questions tend to be quantitative in nature.
Our review of the market internals and techncials (find
them here
) suggest this is merely a bounce or trading rally, and not the
start of a whole lot more.

As we mentioned last week, this rally is guilty until proven otherwise.


After setting a double top near 5,000 (black arrows and purple line) the transports completed that double top formation by closing below the 4,475 level (green line). However, the recent oversold bounce off a long term up trend line (red line and gold arrows) has created a test of overhead resistance near that 4,475/4,500 area. This resistance area, given the large run from 2002 to 2006 is likely to see shares fail then fall to its next level of stronger support near 3,800 (purple and blue lines). One thing appears fairly certain the double top near 5,000 is likely to stick for a while and transports should be viewed as underweight here or only as a trading vehicle when key support levels are tested.

We still retain a bias that the market is on uncertain footing as; internals remain weak, the NASDAQ underperforms (historically the markets typically do better when NASDAQ leads not lag), the seasonality cycle enters its worst period (August/September) and transportation stocks lag. The only thing that is a glimmer of hope that market can restore its’ upward movement is that sentiment surveys (AAII & Investors Intelligence) suggest there are too many bears currently in the crowd. However with sentiment being the only positive prong at this point we would suggest a trading rally is more likely to ensue more than another extended leg up.

S&P 500 Index and Dow Jones Industrial Average – Daily Charts


NASDAQ Cumulative Advance Decline Line & 52 Week Hi-Lo Index – Daily Charts


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