Thursday, April 25, 2013

moving higher but weakness shows beneath the surface

Here are three charts which illustrate well the US stock market's current condition.

The bottom chart shows the Dow industrial average for the better part of the last two years. As you know I think the Dow and the S&P have rallied just about as much as one can reasonably expect before a substantial reaction sets in. Against this background of a very overbought market I think I can make out what may well be the peak of the Dow's domed house - points 21,23, and 25 in the Lindsay schematic - which I have discussed in previous posts.

The rally from last week's low points hasn't moved the Dow or the S&P to new historical highs just yet but I think this is likely to happen within the next few days. However, as you can see in the top two charts above this post the technical condition of the market is rapidly deteriorating.

The top chart shows the 10 day moving average of the number of daily advancing issues on the New York Stock Exchange. This oscillator reached its high for the rally off of the November low points in December of 2012 and has since put in a sequence of lower tops. It is currently well below those tops despite the recent rally in the averages.

The middle chart shows the 20 day moving average of the daily number of 12 month new highs on the New York Stock Exchange. After making its top this past January this indicator has dropped steadily and is not likely to turn up substantially until the market drops 10% or more first.

These indicators illustrate the fact that the bull market advance which began from the June and November 2012 low points is living on borrowed time since fewer and fewer issues on average are participating.

While the short term trend is clearly upward but any turn downwards from current levels which shows up via a daily close below a preceding week's low print would be very bearish.

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