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Today's Market WrapUp 03.29.2007 Mon Tue Wed Thu Fri Goldberg Archive Price
and Volume Provides Clues
In an ever more sophisticated and complicated universe of technical analysis indicators and models, it sometimes pays to take a step back and utilize the oldest and most effective method of technically analyzing the market. Simply stated, this is an analysis of price and volume. Such an analysis can keep the analyst firmly planted with their mind focused on the cold reality of what is actually taking place in the market. The cold reality of the present is that there is deteriorating action in the S&P 500 in recent weeks and for this reason, traders should probably look for selling opportunities until and unless the current price and volume relationships change. Weekly time frames are often effective time frames to use for an intermediate term price and volume analysis. While daily volumes can be affected by stray events such as a Fed meeting or Bernanke speech, it is more difficult to “hide” weekly volume trending. For example, the “follow through” day referenced last week, didn’t hide the fact that in spite of bullish weekly price action, the corresponding volume for the week was completely unremarkable. This was a divergence. Below is an annotated one year weekly price volume chart of the S&P 500 index. There are at least 6 weekly volume clues that would have proven to be valuable since the beginning of the summer rally.
Note A – The 1220 area as an important support area was signaled by two very high volume weeks (in early June and mid July) where 1220 was defended. The mid July bullish (long white) up candlestick was confirmed by high trading volume, and this was a strong indicator that the summer rally had sustainability. Note B – Then a possible resistance area, 1322 (shown by the horizontal black line) was broken on better than average trading volume. Again, this signaled that there was a high probability that there was still more duration until the summer rally was over. Note C – Toward what may have been the end of the summer rally, there was a price-volume divergence. As the S&P 500 continued to rise, the weekly volume bars became consistently and progressively lower for each of 5 successive weeks, signaling a price volume divergence. Note D – The holiday shortened week of February 20th saw only 6.6 billion shares traded on the S&P 500 as the price tried to make a new high. The 5-day equivalent volume was only 8.7 billion shares traded which was significantly less than the 9.46 billion traded the previous 5 trading day week. The extremely low volume as the index tried to push to a new high was a significant divergence between price and volume and turned out to be a valuable clue. Note E – The last week of February saw the price turn from trying to make new highs to decisively downward, while the volume went from anemic to the most ever. Once again, both price and volume were in gear while the price action turned from bullish to bearish. Note F – In spite of decisively bullish price action last week as indicated by the long white candlestick whereby the Monday open was the week’s low and Friday’s close was near the high, the weekly volume didn’t confirm. The volume traded last week was the lowest of the last four weeks. Still as of Wednesday, there is something for bulls to hold on to as the weekly volume (as of Wednesday evening) is subdued in spite of bearish price action. A look at the price volume of the short term daily chart below is in order. Key daily price and volume clues are as follows:
Note G – Support held at about 1375 (IBD initial rally day). Note H - IBD follow thorough day (benefit of the doubt went to the bulls). Note I – 1440 proves to be successful resistance for 5 days. Day 4 of resistance shows a bearish hangman candlestick pattern. It is confirmed the next day with a close below the “head” of the hangman. Note J – Bearish short term trend is confirmed with a bearish day (Wednesday) and this is confirmed with increasing volume. Suspense on Wednesday evening as the S&P 500 index closes directly upon the popular 20-week exponential moving average (shown). End of quarter portfolio action lends some additional potential for confirming trading volume and/or a possible market rally. Today’s Market The S&P 500 staged a late day recovery that “saved” the 20 day exponential moving average. With the positive price action, volume was a fairly benign 2.4 billion shares. Short term and of perhaps of little practical value to most folks, it appears as if there is some minor resistance near the hangman’s feet at 1430 and support at about 1410.
On a weekly basis, through 4 days the trading volume is about the same as it was last week; and while somewhat bearish, it is not as bearish as last week’s was bullish.
Three weeks ago, I suggested that readers keep a jaundiced eye on the bond market as the chart of the long bond ETF (symbol: TLT) was referenced. As it traded at a price level of $90.35/share, a jaundiced eye was appropriate. But this discussion is not about being “right.” It is about identifying adequate risk to reward opportunities. At the price of three weeks ago, one could put on a position at a level where the risk of loss was small.
As it turned out there was reason to keep a jaundiced eye on the bond market as the recent price action confirms below.
Looking to the future, it now appears that the bond market is not responding as favorably as it used to after news of economic slowing surfaced. Further, while down days in the stock market have been good for the bond market, it may also be significant that in the most recent week, bearish stock market days have not helped bonds all that much. It also appears that good days in the stock market are also bad days for bonds. Finally, there seems to be a pattern of technology stocks falling out of fashion that is ominous. As shown in the weekly price volume chart below, relative to the S&P 500 the Nasdaq 100 has been making a series of lower highs. After a relative strength snap-back rally that began in the summer, since December of ’06, support for the Nasdaq 100 relative to the S&P 500 has been holding at about 1.24, as the NDX has been making a series of lower highs.
Oh, and Dell is selling off after hours on headlines that an internal audit found accounting errors. Unless support comes early on the last day of trading in the first quarter, the technical support for the Nasdaq 100 relative to S&P 500 will be threatened. (And I’m sure that accounting errors, if there are any, are just an isolated event and that such events will not impact upon the technology sector. I’m sure that the accounting in the technology sector is not particularly aggressive. Also, I’m awaiting the imminent arrival of the Easter Bunny.) I’m getting ever closer to a more comprehensive newsletter that is going to go “live” soon. Feel free to drop me an email, as I value your input and try to respond to comments. Have a great evening. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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