After gapping lower on the open, the major indices quickly reversed into the
plus column. Stocks continued their advance through mid-day, but afternoon
weakness again caused stocks to surrender a chunk of their intraday gains.
Nevertheless, each of the main stock market indexes finished with a respectable
gain. The Nasdaq Composite climbed 1.0%, the Dow Jones Industrial Average 0.7%,
and the S&P 500 0.6%. The small-cap Russell 2000 and S&P Midcap 400
indices rallied 0.9% and 0.8% respectively. The S&P 500 and Dow Jones
Industrial Average closed just above the middle of their intraday ranges, as the
Nasdaq Composite settled just off its best level of the day.
The key ingredient missing from yesterday's session was higher turnover.
Total volume in the NYSE decreased by 16%, while volume in the Nasdaq came in 8%
below the previous day's level. Unfortunately, a lighter volume day of gains
that follows a higher volume day of losses is exactly the opposite of what the
bulls want to see. Furthermore, volume in both exchanges limped in at its
lightest levels in weeks or more. If institutions remain more active on the
"down" days than the "up" days, the stock market will eventually succumb to the
selling pressure. This is because mutual funds, hedge funds, pension funds, and
other institutions represent well over 50% of the market's total volume on an
average day. Detecting changes in the market's volume patterns, in relation to
prices, is one of the most reliable ways to know the true strength or weakness
of a market. Recently, the overall price to volume relationship of the broad
market has turned negative. This may contradict the modestly bullish bias of the
market, but volume is typically a leading indicator of market direction, not a
lagging one.
Over the past week, we've analyzed chart patterns of various sector ETFs we
liked for entry on both sides of the market. Today, we're going to take an
updated look at the chart patterns of the main stock market indexes. We'll begin
by analyzing the daily chart of the benchmark S&P 500:
The intermediate-term uptrend line that began with the July 15 low can
clearly be seen (the ascending red line that connects the "swing lows").
Interestingly, both the 10-day moving average (the dotted line) and 20-day
exponential moving average (the beige line) have converged at support of that
uptrend line as well. This is important to note because the convergence of
support corresponds with yesterday's low in the S&P 500. If this major area
of support holds up, as it has in recent weeks, the S&P 500 could soon push
to a new "swing high," above the Aug. 11 high of 1,313.
