Mark S. Young | Idaho Falls, ID

While Wednesday’s reversal from down to up, following the testing of neckline support by the Russell 2000 (see 8/25/10 report), was encouraging, the short-term downtrends that exist overruled yesterday. Unfortunately, a lower-than-expected jobless claims figure provided only short-term relief for the stock market. The DJIA reversed from up 44 points to down 92 points, only to close with a loss of 74 points. The NASDAQ fell almost 23 points. Concern about Spain’s fiscal stability, nervousness over today’s 2Q10 GDP revision, and Fed chairman Bernanke’s speech weighed heavy on stock market participants.

On the NYSE, volume contracted to 1.04 billion shares. There were 894 net declining issues. Finally, something good from the “internals” yesterday; specifically, there were only 38 new 52 week lows, yet the DJIA closed below Tuesday’s level when there were 171 new 52-week lows. This is a short-term “bullish divergence,” and when combined with the “testing of support” recently by the Russell 2000 (see paragraph two), it portends some upside probing, within the context of near-term downtrends.

Within the context of short-term downtrends, until stock market indices close above resistance, please continue to expect a difficult (think “defensive”) backdrop. A close below support will simply accelerate downside pressure. The first scenario will have bullish short-term ramifications while the second will be bearish. Please trade accordingly.

( Note: Hindenburg Omen – per an article in the 8/26/10 edition of the Wall Street Journal, “Indeed significant stock market declines have followed the indicator just 25% of the time.” From this writer’s perspective, this also means that in 75% of the cases, a significant stock market decline failed to occur.

Thursday Afternoon 08/26

At the expense of most commodities and with the recent exception of the grain markets, it seems that “everyone” is talking about Gold. Yet due to the following charts, I want to focus on a few bullish attributes of Silver instead:

While I know it is virtually impossible for most investors to take such a long-term perspective of a commodity, much less one that is historically as volatile as Silver and this includes me, I want to encourage you to try.

For “short-term proactive junkies” and while patience and good discipline (use a violation of support accordingly) are critical, shown below, are some charts to consider:

To view a chart of Silver, please go to the following website: futures.tradingcharts.com.

Wednesday Morning 08/25

According to Investor’s Intelligence (II), here are the most current BULL – BEAR newsletter advisory sentiment figures and some comments from II:

The conclusion of earnings season meant an end to positive results. Investors now turn back to the economic data which continues to paint a darkening picture almost daily. New jobless claims increased and manufacturing is now slowing. Each successive news release about the housing market is worse and consumers understandably remain reluctant to spend. Corporations see no reason to hire and the lack of jobs only increases the perception of poor times.

The newsletter editors continue to react as would be expected, with fewer expressions of optimism. The BULLS ended at 33.3%, down from 36.7% last week and 41.7% prior to that. The BEARS were almost unchanged at 31.2%. Six weeks ago there were more BEARS than BULLS, a positive sign and we are close to similar reading again, signaling a build-up in cash sitting on the sidelines.

Relative to yesterday’s tape action, if I described Monday’s tape action as bearish, how would one describe yesterday’s tape action? With stock market indices gapping down at the open, the 10:00 a.m. housing figures helped accelerate the decline. The DJIA recorded its intraday low, down 183 points, just after the housing figures were released. From there, the “tape” was choppy but it exhibited a predominately negative bias. At the close, the DJIA fell 134 points, or 1.32%. The NASDAQ was even weaker, down almost 36 points, or 1.66%. U.S. Treasuries and the DJ Utility Average rose, continuing to record bullish relative price action.

On the NYSE, volume expanded to 1.17 billion shares. Heavier volume totals would be a sign of capitulation but the current average volume readings imply that participants are more complacent than panicked. There were 1583 net declining issues and a whopping 171 new 52-week lows. I tell my now 18-year old daughter, “nothing good happens when you are out after midnight.” Well, nothing good happens when new 52-week lows consistently expand, as they have done for the past week-plus.

The technical action in the major stock market averages continues to weaken as the weight of “technical evidence” has pushed into the negative camp. This emphasizes the importance of remaining cautious (manage risk, have some cash, start a “watch list”) until the rally is back in an uptrend (higher troughs and higher peaks) or until stock market indices close above resistance. Speaking of such, both the NASDAQ and S&P 500 closed below support and remain confined to short-term downtrends. Speaking of breakdowns, the Semiconductor Index (SOX) completed a top. The DJIA closed above near-term support at 10007.

Critical intermediate-term support levels for the NASDAQ and the S&P 500 are the July 1 lows, currently at 2061 and 1010, respectively. When those levels get tested, it will be critical to measure the selling pressure versus what was recorded in early July!

When it comes to discerning Wall Street’s tolerance for risk (are more participants taking on risk [bullish] or avoiding risk [bearish]), comparing the performance of Consumer Staples stocks (things people need) to Consumer Discretionary stocks (things people want) is a good guidepost.

The stock market usually performs best when the Consumer Discretionary Select Sector SPDR Fund (XLY) outperforms the Consumer Staples Select Sector SPDR Fund (XLP). Conversely, stocks perform poorly when the XLP outperforms, as shown below, because it reflects a defensive mindset (risk adverse), not one that is willing to take the risks needed to propel the stock market higher.

Viewed somewhat differently but also showing how “dollars” have been flowing to more “defensive” areas of the stock market, shown below are relative strength trends, versus the S&P 500, of exchange traded funds representing the Utility (XLU – 4.09% yield), Telecommunication (TTH – 5.90% yield), and Consumer Staples (XLP – 2.71% yield) areas of the stock market.

Finally, “what would it take to turn the intermediate-term trend bearish?” While everyone was talking about the major patterns of distribution (Head and Shoulders top) in July, I don’t hear anyone talking about the current chart configuration of the Russell 2000 (RUT), as shown below.

While the “neck line support level” in and around 588 held yesterday, which may cause some sort of near-term bounce (yes, I have expected a short-term bounce recently and been wrong), a breaking of said support level would have bearish intermediate-term implications and an even more “defensive” posture.

Tuesday Morning 08/24

( While technical analysis doesn’t always have the answer, many times it is excellent for discerning appropriate questions about the current “going-on” of the market. So I ask: “Given the historical track record of the stock market to rally following a reading from the ARMS Index comparable to its August 11 reading, why isn’t it happening?” When combined with an expansion in new 52-week lows, this implies identifying positions that are beneath their July lows and taking the necessary steps to hedge off long-side risk!

If you look up the definition of bearish tape action, you’ll see yesterday’s date. The DJIA recorded its intraday high, up 91 points within the first 30 minutes of trading, and was unable to extend it or even hold onto any of it! At the final bell, the DJIA lost 39 points. The NASDAQ, down 20 points, was hurt by poor action from AAPL (highest weighted stock in the index – more below) and INTC (seventh highest weighting). From a “tape action” perspective, it appears that Wall Street didn’t take INTCs recent M&A news well as the stock has closed below its July low and recorded an eight month relative strength low versus the SPX – chart follows.

Speaking of the NASDAQ, a close over resistance at 2309 would be bullish, short-term; a close under support at 2155 would be bearish, short-term. In terms of the S&P 500, a close under support at 1056 would be bearish, short-term; over 1129-1131 is bullish. For the DJIA, short-term support = 10007.

While machinery, steel, leisure, and semiconductor stocks lead the way lower yesterday, the financial complex, as defined by the Financial Select Sector SPDR Fund (XLF/$13.74) continues to record a new relative strength low, versus the S&P 500.

Within the context that Crude Oil has closed below both a short-term and long-term uptrend line (bearish, Crude Oil has minor support at $71 but more critical support in the upper- to middle-$60’s – see chart below), the 200-day moving average (DMA) of the Energy Select Sector SPDR Fund (XLE/$52.21) has rolled over. Unless the XLE can breakout at $57, this moving average will essentially act has a cap on rally tries. If there is a “positive’ about this, it is that Gasoline has also broken down, hopefully offsetting pressure on the consumer from other areas of their life. You can view charts of these at futures.tradingcharts.com.

How’s this for a stock market guidepost, given its position in the NASDAQ and S&P 500? Below is a line chart of Apple Inc. (AAPL). What isn’t evident is that despite a lot of good fundamental news over the past few months, the stock has struggled (since June, its relative strength line is trending down) and broke down on a near-term basis yesterday at $246. From here, a test of the stock’s next support at $239.60 (July 19 low and 150-DMA) is inevitable, and a test of its rising 200-DMA ($231) is a strong possibility.

Monday Morning 08/23

( It is just as important that you protect your capital as it is to try and anticipate a major turning point; keep your capital safe and

“Choppy is as choppy does.” Specifically, last Tuesday, the DJIA was up 178 yet closed up 104. On Wednesday, the DJIA was down 75, up 67, yet closed up 10. Thursday was simply a lousy day with declining volume equal to 91% of total volume, and the DJIA lost 144 points, after being down almost 200 points pre-noon. Friday’s “options expiration activity” saw the DJIA drop 124 points yet close with a loss of 57 points; the NASDAQ actually closed higher by almost one point. On the NYSE last Friday, volume expanded to 1.12 billion shares. There were 488 net declining issues. The big problem was that new 52-week lows (95) exceeded new 52-week highs (83), meaning more stocks are breaking support than are breaking out to the upside (bearish – weak technical action). For the week, amidst all this and as traders digested a flurry of M&A activity and the latest round of lackluster economic data, the NASDAQ edged up 0.3%, the DJIA fell 0.9%, and the S&P 500 lost 0.7%. “Choppy is as choppy does.”

The stock market’s inability to rally off the oversold condition based on the August 11 reading of the ARMS Index and the persistent rise in new 52-week lows is bearish on a short-term basis. Within this context, please use any rallies to hedge, reduce, or sell positions that are beneath their July low.

Consistent with this, I am going to reiterate a comment I made last week concerning the NASDAQ, namely “we can expect this sideways/choppy action to continue until the NASDAQ closes above resistance (2309) or below support (2155). The first scenario will have bullish short-term ramifications while the second will be clearly bearish, short-term.”

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Weekly Technical Commentary by Art Huprich

Think Defense

Friday Morning 08/27

Thursday Afternoon 08/26

Wednesday Morning 08/25

Tuesday Morning 08/24

Monday Morning 08/23

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