Monday, April 6, 2009

Market Monday's -- Is This a Real Rally?

This will be a long post. I will keep it up until I post a Today's market post after trading is over. I'm going to take an in-depth look at the recent rally along with the market's overall direction to see if we have put in a bottom. I should add the following two caveats.

1.) For me, market analysis is about percentages. Essentially I look at all the data and if 50.1% leans one direction then that is the direction I will look in. Actually, I ideally want more than a mere simply plurality. But you get the idea. And in a perfect world, we want 100% of the data in one direction. But we're not going to get it. So, hopefully, we can find at least say 60% of the data going in one direction or the other.

2.) The markets and the economy like to make an ass out of me whenever possible.

Let's begin.

Here is the chart that started this line of thinking:

The market topped in 2007. Since then we have had 4 rallies which provided a gain of (roughly, I'm eyeballing the chart) 16%, 8%, 26% and 25%. Again -- these are approximations. The point is this rally is one of the larger rallies we've seen.


We've seen the market move through previous levels before. Take a look at the chart above and note that prices have moved through previously established price points before but subsequently solid off. So if we're going to call this a rally or a turning point we'll need far more information from other sources.

Finally, prices are still contained by the downward sloping trend line that that connects the recent highs. While there is a longer downward sloping line from the market top, I'm a bit reluctant to use it over the line that connects the more recent highs. Simply put, I'm more interested in reading these charts from a conservative angle.


The SPYs have moved through the above drawn line.

First, take a look at this chart of the Transportation average:

Note that the transportation average held in until the end of 3Q 2008 -- an incredibly long time. But since that time prices have crashed, falling 43% to their current level. However, let's add an important trend line:

Last week the transportation average breached the downward sloping trend line that started when the market dove lower at the end of 2Q2008. Here's a closer look at the breach:

Prices gapped higher several days ago when they also moved though the 50 day SMA. Also note the 10 and 20 day SMAs are moving higher and prices are above all three SMAs. The main problem with this chart is the lack of volume on the move higher. Ideally we want to see a stampede into stocks to say we are definitely moving higher. But the lack of volume could also be a sign that retail investors are staying away from the market and instead we are seeing the smart money move in. In addition, consider the following chart of the Transports using exponential moving averages:

On this chart, the 50 day EMA has moved into a horizontal position while the 10 and 20 day EMAs are closer to crossing over. Also note that prices are above all the EMAs.

But note that downward sloping trend line which connects the highs from late December and early January is still intact. However,

Prices have crossed over the above drawn downward sloping trend line.

Let's add a few more data points to the mix:

The QQQQs have recently broken through key resistance established earlier this year. This is technically an important important development. In addition

A closer look at the SMA picture of the QQQQs indicates the 10 and 20 SMAs have crossed over the 50 day SMA, all three SMAs are moving higher, the shorter SMAs are above the longer SMAs and prices are above all three (although still below the 200 day SMA). Bottom line, the QQQQs are now in a very bullish profile, although ultimately we'd like to see more of an upward angle on the 50 day SMA.

Finally on the equities side, let's take a look at the IWMs:

Notice that prices moved though the long, downward sloping trend line that started at the market top almost a year ago. However, I'm a bit uncomfortable using this line, largely because it starts at an incredibly high price spike that was far higher than then then prevailing prices. So let's look at the IWMs using some of the shorter trend lines:

Notice that there are two downward sloping trendlines that connect recent price highs. Prices are about to move through one and are nearing the second. In addition,

The 10 day SMA has moved through the 50 day SMA, the 20 day SMA is moving higher and prices are above all the SMAs. On the con side, the 50 day SMA is moving lower and the 20 day SMA is still below the 50 day SMA (although it is moving higher). But also note on the second IWM chart, we've been in a similar situation regarding the SMAs before and didn't get anywhere.

So with the Russell, we're really close to making a technical break through but we're not there yet. However,

The IWMs have already broken the above line, indicating further breaks are clearly possible.

Finally, let's take a look at market breadth:

The NY advance/decline line may be in the middle of a bottoming formation. Ideally, we want this line to make an advance beyond the horizontal line established at the beginning of this year.

The NASDAQ's advance/decline line is still in a clear downtrend. However, prices are just about to move across one of the downward sloping trend lines containing prices from the upside.

I find the above two charts of breadth to be extremely important; they indicate that at minimum the overall market direction is neutral. In addition, while the QQQQs have broken out of important technical levels, they have done so on negative market breadth. This is not a good development; ideally, we want to see a market advance on an increasing breadth indicator. And the fact that the NYSE market breadth has yet to move through previous highs on a strong advance adds to my concern.

So let's sum up:

-- The SPYs have made a strong advance over the last few months, but have done so before only to return to their downward move. In addition, the trend line that connects recent highs still contains (is above) current price action.

-- The Transports recently broke through their longer downward moving trend line but did so on weak volume. In addition, this is a recent break. Finally, a trend line that connects the more recent tops still contains (is above) prices.

-- The QQQQs have broken through an important trend line.

-- The IWMs are about to move through an important downward sloping trend line and have already moved through the longer line that connects the 2008 high with recent prices

All of the evidence leads me to literally a 50/50 conclusion at best. And that isn't good enough.

At a minimum, I would like the following to happen.

We have the QQQQs breaking key levels. That's a good start. The IWMs need to move through the downward sloping trend line just above current prices. In addition, we need one more of the averages -- preferably the SPYs -- to also more through a downward sloping trend line that connects more recent price highs. While the SPYs, IYTs, and IWMs have all moved through some of the sharper downward sloping lines, each still has an important "containment" line above it that prices must move through for this to be a rally.

In addition, we need to see the advance/decline lines of both the NASDAQ and the NYSE break important upside resistance levels. This is also incredibly important because it would indicate money is flowing back into equities in sufficient quantity to change the market's internal dynamics.

But finally, I would add we're on the brink of a change. The averages are inching towards it but just aren't there yet.