Technical Watch Cumulative Charts

Cumulative Data
Week Ending 5/7/04

NYSE: 266 advancing issues and 3147 declining...an interesting week indeed!

What Friday's action did to the cumulative charts is also interesting as well.

As suggested last week, the current objective for the A/D data points is the 1% trend line (200 day EMA) in which the A/D volume and breadth charts are now either close to or, in the case of the NASDAQ breadth chart, continues to unwind below this demarcation between overall positive and negative money flow in to or out of the equity markets.

What Friday's decline also manufactured is a definitive break of the cumulative new highs/new lows data points on the NYSE and AMEX for the first time since last March, something of which needs to respected to what it suggests for the market as a whole.

So, with this kind of knowledge, what outcome should be expected moving forward? And for the near term - did we finally get the internal purge needed to build a better base in which to rally or can Friday's action suggest a kick off to something more damaging for the intermediate term (2-6 months)?

Strictly using the cumulative data as a reference to make such judgments, one should logically look for a bounce to take place at or near these present levels to materialize in the next two or three days. What will be most important is not so much when we get this bounce, but how we bounce that will give us a better trading picture moving forward. The breadth version of the McClellan Oscillator, which measures the short term trend strength of these same A/D charts, is now considered very "oversold" with respect to the NYSE (-82), while the NASDAQ is also at levels in which reversals have taken place in the past (-52). The Oscillator's sister tool, the McClellan Summation Index, has both the NYSE and the NASDAQ markets at about the same negative levels as each other
(-452/-481 respectively), but more importantly, suggests that the overall market is once again in synch which is beneficial in understanding the path of least resistance in which price should take to generate profits in the market overall. In this respect, the bears are in firmly in control at the present time, and will continue to be so until the Oscillator can once again cross above the zero line to turn the Summation Index back up. What becomes important for the bulls longer term is that both NYSE and NASDAQ MCSUM's should remain above the lows made back in October 2002, something of which the NYSE MCSUM is now within striking distance of challenging. A take out of this same low would reduce the chance of a further price advance in which new price highs could be made, and minimally speaking, an intermediate term trading range would more than likely be the direct result in which can take on several forms. Additionally, a move below this same 10/02 low, and more importantly, a move below the summer 2002 lows in the Summation Index, would suggest that a major price decline would be in the offering on an intermediate to longer term basis.

Near term, Friday's breadth did some technical damage for the short term, and respecting the idea that breadth leads price, along with the broader market price measures such as the New York Composite Index breaking price support in the process, combined the lack of real fear Friday's move generated, the market is at a vulnerable point in the pattern in which and swift and scary decline could take place to finish this current correctional process. This would also allow the 10% and 5% trends to move down to the 1% trend line where important internal bottoms usually take place, no less shake the confidence of those who look at fundamental data to make their investment decisions.

Elliott Wave wise, Friday's breadth is more consistent to what one would see near a corrective "A" wave bottom and not the kick off to a major correctional decline. The reason for this lies solely with the Summation Index where events like this usually take place when this tool crosses below the zero line and not in deep negative territory in which we're at presently. This idea would then suggest a "B" wave rally retracement to begin fairly soon, with a finishing "C" wave decline to follow - probably culminating with the next 9 month cycle low due in August.

In summary then, the market is more than likely going to trade net sideways now for the better part of the summer while it waits for additional clarity as to the true direction in which prices would be perceived as fairly valued, and with all of the outside domestic and geopolitical "noise" that will probably be generated, it should turn out to be a rather bumpy ride during this same time period as well.

Near term though, I would expect next week to be quite volatile as we look to set a short term price bottom, and where the major indices will play tag with their respective 200 day EMA's during this process.

The above charts are courtesy of StockCharts.com

Comments provided are for informational purposes only
and not intended for trading purposes.

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