Market Risk: Why Upside Moves Will Not Be Easy

07/14/10 — Markets are on a five-day winning streak, but it still may not be an opportune time to rejoice and plow into stocks. However, it’s a start, especially given what we have been experiencing during the correction. On the charts, you want to see a base formation and supportive buying firm up.

The near-term technical signals have strengthened, especially with the bigger companies represented by the DOW and S&P 500. The DOW crossed above its key 50-day moving average (MA) on Tuesday. Tech and small-caps remain neutral, with a slight negative bias. Relative Strength has strengthened to neutral from weak. Yet be careful, as the 50-day MAs on both the DOW and S&P 500 have broken below their respective 200-day MA, which is bearish and could signal additional near-term weakness.

Another red flag is that the five-day winning streak was associated with light volume, which is a negative divergence. We have seen some higher volume on down days, which is a red flag. Unless we see volume rise on up days, I continue to question the sustainability of upside moves.

The trend of the NYSE new-high/new-low (NHNL) had been edging higher, with 13 straight sessions bullish from June 10 to June 28, but six of the last nine sessions to July 12 were neutral. In the technology area, the NASDAQ has been negative, with six sessions showing a bearish sign before reverting to neutral over the last three sessions.

My near-term technical assessment is as follows:

NASDAQ

The near-term technical picture has been strengthening and is currently showing a neutral sign. The Relative Strength (RS) has also strengthened to neutral, so we could see mixed trading in the near term.

The NASDAQ has rebounded back above 2,200, but remains below both its 50-day and 200-day MAs of 2,260 and 2,253, respectively. Also watch for a potential move of the 50-day MA below the 200-day MA, which would be bearish.

DOW

The near-term technical picture for the DOW has strengthened to moderately bullish with neutral RS, so there could a slight positive bias in the near term. The DOW rallied above its 50-day MA of 10,285 on Tuesday and is eyeing its 200-day MA of 10,367. There is a bottom at around 9,800 on the chart. Watch for support at the pivot points at 9,758 and 9,622.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 have also strengthened to moderately bullish with neutral RS. The S&P 500 is above the key 1,040 level and hovering just below its key 50-day MA of 1,097 and below its 200-day MA of 1,111. There is a bottom at 1,040 on the chart.

RUSSELL 2000

The Russell 2000 is back from a brief move into bear territory. The near-term picture for the Russell 2000 is neutral, with average RS, so the index could see mixed trading. The index is just below its 200-day MA of 638 and its 50-day MA of 650, but these levels may soon be taken out. Watch for key support at 600.

I advise to continue to watch the charts, especially with downside crossovers of the 50-day MA below the 200-day MA, which historically has been a decent indicator when used in conjunction with other technical indicators.