Technical Update 28.09

The market's parabolic rise continued last week, adding another 4% to the prior week's gains. Speculators were dialing 1-800-Get Me In as optimism rose that the recession is soon to be distant past. Financials and commodities continued to lag behind, leaving a glimmer of hope for the bears.

I continue to watch in amazement at how higher prices begets more optimism - not less. One minute I'll hear on TV that optimism is the cause for the rally and the next minute the rally is cited as cause for further optimism.

I'm doing what I do best. Using popular sentiment as a contrary indicator while respecting that market insanity can perpetuate itself further than usually believed. Below is the MarketPsych Sentiment indicator (ht John at GD). They take the number of "fear" words found in newspapers and use their findings as a contrary indicator. As of this week, the amount of such words found is the lowest in one year, matching levels seen at the October and January highs. Both such readings preceded near immediate turns, resulting in 25-30% losses. (the blue line is the sentiment indicator [lower reading equals higher sentiment] overlaid on the QQQQ ETF).



For those that follow DeMark patterns, I will note that both the Nasdaq and S&P have registered numerous "sell" setups and in order to be perfected, would require a rise past 1000. Regardless, the daily charts will confirm a sell signal with a close below the close of four days prior.

It's probably something readers are getting sick of reading, but the market appears "overbought" based on various momentum and relative strength indicators. As seen on the chart below, the RSI has peeked above the 70 line for the first time in more than a year.



As mentioned, the banks remain weak despite the overall market's attempts to drag it higher. They barely squeezed out a positive performance this week.



Internals are showing negative divergences. The percentage of stocks above their 50day MA is lower now than it was at the June highs, suggesting weakening leadership.



101 NYSE issues managed to hit new 52-week highs on Thursday. Make what you will of that.



Dr. Copper has run into some strong resistance at its 100 and 200 day EMAs. A reaction to this resistance could set up a decent short opportunity.



The US Dollar Index and the Euro are almost mirror images of themselves. But when one of the indices makes a new high or low while the other does not, the non-confirmation typically provides for low risk opportunities to go the other way. As both press their December and June highs, it will be interesting to watch for such a possibility. The typical cause of such a reaction is the Yen's pull on the dollar index, so that might be something to watch.




Have a good week.

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