Thursday, March 24, 2011

A Warning Sign From an Overlooked Index

In contrast to the blocks of buyers at the opening bell that we had seen for three successive days, yesterday opened with a whimper. Trading was very slow and confined to a narrow range as slightly more than 800 million shares were traded on the NYSE. Mild profit-taking put sellers in charge for the entire day, and so the advance was halted at major technical barriers.

Daily Stock Market News

Dow: -18 points at 12,019
S&P 500: -5 points at 1,294
Nasdaq: -8 points at 2,684

Volume and Breadth

NYSE: 823 million shares traded; decliners ahead 1.3 to-1
Nasdaq: 437 million shares traded; advancers ahead 1.5-to-1

Futures and Related ETFs

May Crude Oil: +$1.88 at $104.97 per barrel; Energy Select Sector SPDR (NYSE: XLE) -17 cents at $77.51
April Gold: +$1.20 at $1,427.60 per ounce; PHLX Gold/Silver Sector Index (NASDAQ: XAU) +1.15 points at 209.75

What the Markets Are Saying

A lack of dramatic headline news, and the wall of sellers at the technical barriers of Dow 12,000 and S&P 1,300, left the major indices shy of important technical resistance zones. The Dow turned away from its 50-day moving average, now at 12,043, and the S&P 500 has yet to penetrate its 50-day, which closed last night at 1,304.

Even during the three-day rally in which the Dow scored two triple-digit days, the Nasdaq has not forged ahead with the vigor that characterized its advances in January and February. Volume for the Nasdaq has lagged on both up and down days. Yesterday, the Nasdaq traded just 437 million shares, its lowest volume since Jan. 25. This could mean that volume will improve if the other two major indices surmount the technical barriers just above yesterday’s close.

But the low volume on both the Nasdaq and NYSE could also mean that institutions are reluctant to make bets at price levels that in the past month have failed to sustain upward momentum. Those levels are not Nasdaq’s or the Dow’s, but rather the important 50-day moving average of the S&P 500 at 1,305, and its January peak of 1,302.

Michael Ashbaugh of MarketWatch points out: “After breaking down last week, the U.S. markets have rallied respectably from the March lows. In the process, a technical divergence has emerged that’s worth considering. Namely, both small and mid caps are showing signs of a pulse, while the broadly based market benchmarks — which are technically more important — continue to lag behind.”

He noted that the small- and mid-cap stocks, as measured by the iShares Russell 2000 Index (NYSE: IWM) and the SPDR S&P MidCap 400 (NYSE: MDY) have edged above their 20-day and 50-day moving averages.

In other words, there is a non-confirmation of small and mid caps versus the broad market and especially the big stocks. One index that covers over 98% of all stocks traded is the seldom-watched Russell 3000 Index (RUA), which yesterday closed under both its 20-day and 50-day moving averages after touching both on Monday. This is not encouraging for the bulls since momentum in the 3000 was rising for three days and now has turned down again. And, most important, the 20-day moving average is crossing through the 50-day moving average — a short-term sell signal!

Russell 3000 Chart

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