Stock indexes near 2011 highs -- New paradigm or something else?

Market Snapshot:

 

Last

Week Chg

Week %Chg

S&P 500 Index

1365.74

+4.51

+.33%

Dow Jones Industrials

12982.95

+33.08

+.25%

NASDAQ Composite

2963.75

+3.90

+.13%

Value Line Arithmetic Index

3035.00

-4.66

-.15%

Minor Cycle
(Short-term trend lasting days to a few weeks)
Positive

Intermediate Cycle
(Medium trend lasting weeks to several months)
Positive

Major Cycle
(Long-term trend lasting several months to years)
Positive / Neutral

In the 1948 stock market classic, Technical Analysis of Stock Trends by Edwards and Magee, the authors suggest that “A Rising Wedge on an arithmetically scaled weekly chart is almost invariably a Bear Market phenomenon, expressing as it does the diminishing vigor which is the normal property of any reaction against a prevailing Primary trend.”

Over the past few months we have alluded to the potential Rising, or Ascending, Wedge we believe has been developing since the October lows. The chart pattern can include three price movements with an initial upward thrust, the “a” leg, that is followed by a corrective pullback, the “b” leg, and then a “c” leg rally that carries prices to the final highs of the overall move. The pattern is also characterized by diminishing trading volume, or as E&M suggest, “diminishing vigor.” The rally since the October 4 short and intermediate-term lows meets the requirements of an Ascending Wedge price pattern.

"Ascending Wedge" Index price targets and attainment – or not

Issue

Last

Target

Recent High

+/- to Target

Above 2011?

S&P 500

1365.74

1376.55

1368.92

-.55%

No

Dow 30

12982.95

13111.99

13013.82

-.74%

Yes

NASDAQ

2963.75

2896.03

2970.88

+2.58%

Yes

Value Line

3035.00

3055.67

3051.33

-.14%

No

Russell 2000

826.92

846.92

833.02

-1.6%

No

Dow 20

5139.44

5384.55

5384.15

-.007%

No



Currently, the potential wedge pattern has become interesting because all of the major indexes including the S&P 500, Dow 20 and 30, NASDAQ Composite, Value Line index and Russell 200 have nearly reached our upside price targets, or have slightly exceeded those levels.

To calculate the upside target in the S&P 500, we first measured price movement from the top of the “b” leg on October 27 (1292.66) to the trough on November 25 (1158.66). We then took the average of the two prices (134 points) and subtracted the October 4 low price from the median price, 1225.66, and came up with 150.89 points. That number was then added back onto the median price of the “b” leg and equaled an S&P 500 projected price of 1376.55, or the measured move target. Last week the S&P 500 reached 1368.92 on an intraweek basis. Its May 2, 2011 price high was 1370.58.

Market Overview – What We Know:

  • Dow Jones Industrial Average and NASDAQ Composite rallied to new highs last week relative to 2011 highs, but S&P 500, Value Line Index, Dow Jones Transportation Average, and Russell 200 did not.
  • All indexes, however, remain within range of upside measured move targets as re-calculated from October 2011 lows and via potential “Ascending Wedge” price patterns.
  • Most Actives Advance Decline Line (MAAD) was positive Friday by 13 to 6, but indicator remains below February 8 high which bettered 2011 peak and equaled March 5, 2008 level. Weekly MAAD, a better reflection of longer-term trending, remains weaker.
  • Daily MAAD Ratio has corrected virtually all of recent “Overbought” readings and was last toward “Neutral.” Weekly MAAD Ratio remains toward “Overbought” territory.
  • Trading volume in S&P 500 declined by nearly 30% last week.
  • Weakness below lower edge of 10-Day Price Channel (1343.90 / S&P 500 --Monday) would suggest beginning of end of Minor Cycle trend in effect since December low (1202.37 / S&P 500).
  • Cumulative Volume (CV) in S&P 500 made new short-term high Friday, but S&P Emini CV peaked February 20 and remains just below that level. On longer-term basis CV in S&P 500 remains about 35% below 2011 highs while CV in S&P Emini is nearly 50% below similar level.
  • Daily CPFL made a new short-term high a week ago on February 20, but has yet to better that level. Indicator remains substantially below February 25, 2011 plot high.

In the accompanying “Ascending Wedge” table notice that of the six indexes listed, the NASDAQ Composite index is the only bellwether that has hit and slightly exceeded its price target. All of the other indexes are within reach of their targets, but have yet to reach those goals. Also notice that of the six indexes, only two, the Dow 30 and the NASDAQ, have hit new highs in that they recently traded above their 2011 price highs. In a word, all are within range of upside measured move targets as calculated from the October 2011 price lows using the same formula by which we calculated the S&P measured move price target.

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