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Wednesday, Oct 10, '07:
Good evening,
It was a mixed day on the markets.
The Nasdaq indices turned around from small losses earlier in the day to finish with small gains. Those indices are now starting to push their luck just a little bit; they are rather overbought, although not showing negative divergences or such, as yet.
The other indices lost a little ground but despite having made new highs over the past few sessions are not overbought and could easily rally further before a top is put in place. There are a couple of things to watch out for, however.
Let's take a look at them...
S&P-500... |
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S&P-500 is just a few points above the '00 highs and the July '07 highs.
MACD has moved to a height that had proved to be resistance (on the indicator itself, as opposed to price) back in Apr/May of this year. RSI is showing a rising trendline; any breaking of this trendline might be a precursor to a correction of the rally that began in August.
Interestingly, volume has tapered off over the past 2-3 weeks, as secular resistance has been approached - and breached. It remains to be seen if this proves to be a non-confirmation of the "breakout".
Dow Industrials... |
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The Dow is also trading above its July-highs, but only by half a percentage point or so.
A couple of warning signs exist on the momentum indicators...
RSI has made a slightly lower high as of today (the first high was at the end of last month). This negative failure swing cannot strictly be called a negative divergence because RSI hasn't moved into overbought territory during this phase. A breaking of the rising trendline on RSI could signal an initial sell signal (or at least a "lighten up on longs" signal).
MACD, for its part, is hinting at a negative MA crossover, but it is important to note that a completion of such a signal on its own will only be an initial signal of an impending correction and not an all-out sell signal.
Traders would want to see negative divergences or negative centerline crossovers on the momentum indicators before looking for a reversal of trend.
Nasdaq-100... |
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RSI and MACD are showing highly overbought readings. If a small correction doesn't take place soon, traders will start reminiscing the most bullish periods of the 90s, during which RSI would trade above the 70-line for weeks on end before correcting.
There is the temptation for conspiracy theorists to call the past month's action as a likely blow-off top. Such a classification would be wrong - even if traders do indeed see a change in trend - because volume has been declining during this period instead of rising as is the case with the aforementioned price formation.
The index is a good 1-4% away from the target of the Cup with Handle pattern that developed on the chart between late-July and mid-September.
Nasdaq Composite... |
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Over the past two days, the COMP has reached the minimum target derived from the inverted Head & Shoulders pattern that had been broken out of in mid-September.
RSI and MACD are highly overbought and the Bollinger Bands are extremely wide. These are typically signs that a trend is near its end.
Its hard to be anything but bullish on the general markets at the moment. However, as we've seen in the case of a couple of the indices looked at tonight, there is reason to be that a correction is on the horizon. The markets will need to put in a couple of down days before sell signals are in place on the charts.
Without the benefit of foresight, it is hard to avoid a lag of a couple of days when spotting a top or a bottom. That fact aside, looking to stay cautious and ready to take profits on longs at the first sign of trouble is probably the best direction to lean in at the moment.
Goodnight and have a great trading day tomorrow!
Asher Pinto |
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