Keep Watch For Near-Term Drop

Markets are pausing at this time as the trading continues to be sideways despite a recent mini rally. The DOW has declined in four of the last five sessions while the NASDAQ is mixed after failing to take a shot at resistance at 2200.

 The daily new high-new low ratio (NHNL) on the NYSE is showing some current strengthening as the near-term trend appears to be edging higher with seven of the last nine sessions at above the bullish 70% level, albeit the last two were below 70%.

 On the tech front, it is a vastly different story as the NHNL ratio for the NASDAQ continues to be weak. Sentiment on the NASDAQ is weaker than the NYSE. We still have yet to see a 70% plus reading since July 3. The last six sessions have been below 50%. And until we see sustained readings at above 70%, I expect the market action to remain apprehensive.

 Breadth, as indicated by the advance-decline line (A/D), has strengthened in the past two weeks but we saw some weakness emerge last week. The five-day moving average for the NASDAQ fell below 1.0 to 0.89, down from the 10-day and 30-day moving averages of 1.34 and 1.21, respectively. But overall, we are seeing some improvement in the breadth.

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 Now let’s take a look at the market volatility to give us additional insight on the market. The CBOE NASDAQ Volatility Index or VXN–a barometer of near-term market volatility based on NASDAQ 100 index option prices–is generally viewed as a contrarian indicator. A high VXN indicates maximum fear and a possible market bottom. A low VXN indicates reduced apprehension and a possible market top. The chart indicates uncertainty.

 The 5-day VXN to August 25 was steady at 19.32. It is above the 200-day MA of 17.66 but below the 50-day MA of 20.83. The recent readings suggest uncertainty.

 The CBOE Volatility Index or VIX is a barometer of near-term market volatility based on the S&P 500 index option prices. The 5-day VIX fell to 12.30, below the 30-day and 200-day moving averages of 14.41 and 13.19, respectively. Watch for a potential near-term top if VIX continues to decline.