During the past week the primary US equity market indices continued to decline with the Nasdaq-100 Index (NDX) and Nasdaq Composite Index (COMPQ) finally giving up their previous positions of relative strength. Momentum indicators suggest continued weakness in the two on a short-term basis. Breadth and sentiment indicators also appear to be moving towards extremes, but just how extreme they will get won’t be known until a reversal is confirmed.

The intermediate trend (see chart notes) and long-term trend for NDX, COMPQ and the NYSE Composite (NYA) remain bullish. This is not the case for the DJ Industrial (INDU) and S&P 500 (SPX), which are both trending sideways on an intermediate basis (approximately 7 months). The specifications for all charts are provided at the end of the article.

COMPQ: Figure 1 displays the weekly chart for COMPQ with price trading between the 50-day and 200-day EMAs and approach the middle linear regression channel line. Volatility shown in the 14-week Average True Range [ATR] continues to rise and the MACD is close to signaling an intermediate downward move. An actual signal may or may not be generated. The downward move in the 50-day EMA is cause for concern in the intermediate trend.

Figure 1: COMPQ Weekly Chart (chart specs appear at the end of the article)
(click here for larger view)

It appears COMPQ found support at the 200-day EMA this past Monday. Continued support at this level or at the middle regression channel line (approximately 2,550) would confirm an intact intermediate uptrend. Watch volume and the MACD index—or another momentum indicator—if the index returns to these levels.

NDX: Figure 2 displays the weekly chart for NDX, which is similarly trading between its 50-day and 200-day EMA. The index had accelerated out of its long-term price channel so a second channel was drawn. It is currently at the upper line of the longer-term channel and may return to it given weakness in Stochastics and an ADX that’s declining (at 26).

Figure 2: NDX Weekly Chart (chart specs appear at the end of the article)

If support is not provided at the upper line of the longer-term regression channel, other potential support may be provided at the 200-day EMA (1,973), the lower line of the accelerated channel (1,911) and the middle line of the longer-term regression channel (1,860). Again, watch momentum indicators at these areas.

NYA: Figure 3 displays the weekly chart for NYA, which is following the theme of the moment … it’s trading between its 50-day and 200-day EMA. This index did decline through the 200-day EMA and middle channel line on Monday, but has moved back above both. Momentum weakness displayed by MACD and a trend weakness displayed by the declining ADX suggest another test of the middle channel line (9,695) and 200-day EMA (9,655) is likely.

Figure 3: NYA Weekly Chart (chart specs appear at the end of the article)

INDU: Figure 4 displays the weekly chart for INDU, which is weaker than the preceding three. As of Wednesday’s close, the index was trading at its 200-day-EMA after closing below two days during the week. INDU also accelerated out of its longer-term regression channel, but with less strength than the NDX and is currently trading in the upper region of this longer-term channel.

Figure 4: NYA Weekly Chart (chart specs appear at the end of the article)

Given momentum weakness that includes a divergence in MACD and Stochastics (not shown), it appears more likely that INDU will test support at the lower line of the short-term, accelerated channel (13,045) and the middle line of the longer-term channel (12,625) than testing resistance at the 50-day EMA which coincides with the upper line of the longer-term regression channel (13,495).

Arms Index charts for both the NYA (TRIN) and COMPQ (TRINQ) are displayed in Figures 5 and 6, respectively. TRIN closed Wednesday in a neutral area, with breadth conditions improving as indicated by the cross of the 10-day EMA above the 35-day & 55-day EMA and a cross of the 35-day EMA above the 55-day EMA (the chart is inverted). Time will tell whether an intermediate low was formed last Friday (11/12/07).

Figure 5: NYA Arms Index (TRIN) Daily Chart

TRINQ is displaying weaker breadth. As of Wednesday’s close the COMPQ Arms Index closed at 1.43 which is in a short-term oversold area suggesting a higher open for COMPQ Thursday morning. All three EMAs show index weakness.

Figure 6: COMPQ Arms Index (TRINQ) Daily Chart

Weekly COMPQ Chart Specs

4-Year Linear Regression Channel (from 8/15/2003 to 8/14/2007) extended to right
10-Week, 40-Week Exponential Moving Averages [EMA]
9-Month Cycle (initiated 10/4/2002)
22-Week Cycle (initiated 10/4/2002)
Moving Average Convergence-Divergence (MACD: 12, 26, 9)
Average True Range (ATR: 14)
Relative Strength Comparison versus Dow Jones Industrial Average

Weekly NDX Chart Specs

4-Year Linear Regression Channel (from 3/31/2003 to 3/1/2007) extended to right
15-Month Linear Regression Channel (from 7/31/2006 to 10/12/2007) extended to right
10-Week, 40-Week Exponential Moving Averages [EMA]
9-Month Cycle (initiated 6/30/1996)
22-Week Cycle (initiated 12/9/1994)
Stochastic (12, 5, 5) with bullish range (40-80) and bearish range (25-65)
Average Directional Index with Directional Movement (ADX, +/-DI: 14)

Weekly NYSE Composite Specs

4-Year Linear Regression Channel (from 3/14/2003 to 3/14/2007) extended to right
10-Week, 40-Week Exponential Moving Averages [EMA]
114-Week Cycle (initiated 12/4/1987)
40-Week Cycle (initiated 10/12/1990)
Moving Average Convergence-Divergence (MACD: 12, 26, 9)
Average Directional Index with Directional Movement (ADX, +/-DI: 9)

Weekly INDU Chart Specs

4-Year Linear Regression Channel (from 3/31/2003 to 3/1/2007) extended to right
1-Year Linear Regression Channel (from 9/22/2006 to 9/21/2007) extended to right
10-Week, 40-Week Exponential Moving Averages [EMA]
113-Week Cycle (initiated 6/29/1962)
20-Week Cycle (initiated 9/4/1998)
Moving Average Convergence-Divergence (MACD: 12, 26, 9)
On Balance Volume [OBV]

Arm’s Index Specs

Daily Arm’s Index on inverted, log chart (light gray line)
Daily New York Composite (NYA) overlay normal, log chart
10-Day, 35-Day and 55-Day Exponential Moving Averages [EMA]
Horizontal lines: 0.70, 1.0, 1.30, 1.50 and 2.85
Vertical line denoting 51-day trading cycle (next date 11/12/07)

Arm’s Index (NASDAQ) Specs

Daily Arm’s Index for the NASDAQ on inverted, log chart (light gray line)
Daily NASDAQ Composite (COMPQ) overlay normal, log chart
10-Day, 35-Day and 55-Day Exponential Moving Averages [EMA]
Horizontal lines: 0.70, 1.0, 1.20 and 1.40

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Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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