What Technical Indicators Are Telling Us

Since the DOW broke above 13,000 on May 1 for the first time since January 3, the barometer of blue-chip performance has been hovering and looking for some direction. Investors do not seem that interested in driving up stocks at this point given the prevailing market uncertainties. Investors remain largely hesitant about taking new positions, as evidenced by the moderate trading volume.

Technically, investor sentiment and market breadth on the tech- laden NASDAQ have improved but continue to suggest caution. On the NYSE, the new-high/new-low (NHNL) ratio remains somewhat weak at this time, with only 11 readings above the bullish 70% since November 1, 2007. However, recent sentiment has been improving versus the bearish sentiment in March. The near-term trend is showing a moderate uptrend, which suggests that investor sentiment is improving. The NHNL on the NASDAQ is cautious, with the majority of readings below 70%. There has not been a 70%-plus reading since October 11, 2007, at the market top. The near-term trend is down.

Another technical indicator I like to monitor is the volatility index, a barometer of near-term market volatility based on index option prices that is generally viewed as a contrarian indicator. A high volatility index indicates maximum fear and a possible market bottom. A low volatility index indicates reduced apprehension and a possible market top.

In technology, the CBOE NASDAQ Volatility Index (VXN) — a barometer of near-term market volatility based on NASDAQ 100 index option prices — has been declining in recent weeks. The lower readings could indicate a near-term top. Likewise, the CBOE Volatility Index (VIX), based on the S&P 500 index option prices, is also declining, an indication of a near-term top.

The key is that there is uncertainty in relation to the upside potential in the near term based on the two technical indicators. I continue to suggest some caution, especially on the buy side, but watch for major declines in stocks to consider entering a trade. Sometimes the best trading opportunities arise when there is volatility.