Quick Update on Broad Markets\
Last week’s article provided a more comprehensive analysis of the broad markets, this week’s includes an updated version with charts that are hopefully easier to see on the web site. The settings are provided at the end of the article. The charts are dated Tue 5/15/2007. Please check out the Analytical Toolbox article “Quarterly Market Assessment” for more detail, as needed.

The S&P 500 (SPX)
SPX has been traveling in the upper portion of a 4-year regression channel, with the weekly price rising above the channel last week. Given the market optimism and positive breadth, as well as strong readings for momentum indicators, it seems this average will be able to reach the historical highs it is moving towards. Traders should keep an eye on the indicators as the index reaches the upper channel line on the monthly chart. Weakness suggests a return back to the middle channel line while strength at the line may provide the power for an upward channel breakout.

In terms of the weekly chart, indicators should be monitored as the index pulls back slightly towards the upper channel line. Decreasing volume and indicators that remain bullish may simply indicate a pause in the current move. Increasing volume and weakening indicators may coincide with a move back into the upper portion of the channel, and possibly all the way back to the middle regression line.


Figure 1 SPX Monthly Chart dated 5/15/2007


Figure 2 SPX Weekly Chart dated 5/15/2007

The Dow (INDU)
A fresh look at the INDU charts displays nice examples of strength when the index moved through the blue, shorter-term upper regression channel in April. Momentum was strengthening and the index level climbed aggressively upward on both arithmetic charts. At the same time the ADX turned upward; this was slightly stronger using the modified settings (as one would expect since they are “faster”).  


Figure 3 INDU Monthly Chart dated 5/15/2007


Figure 4 INDU Weekly Chart dated 5/15/2007

The Nasdaq 100 (NDX)

The NDX is largely associated with technology companies since it represents the top 100 Nasdaq names, sans financials. This index has lagged SPX and INDU from a relative strength standpoint. On the weekly chart, the index appears to be moving back to the middle regression channel. This is occurring as the ADX is signaling an intact upward trend and the Stochastic indicator remains bullish. On a monthly basis, the index level appears to be pausing as the trend indicator suggests the upward movement is intact. Momentum is similarly bullish. See the Sector Assessment for more insight on this index.


Figure 5 NDX Monthly Chart dated 5/15/2007


Figure 6 NDX Weekly Chart dated 5/15/2007

Sector Comments
The strength of INDU—comprised of large-cap names that include industrials, financials, technology and transportation—is pretty notable. The slight uncertainty of the NDX appears to contrast with the other two averages; however, it is not diverging.


Figure 7 SPDR Sector Flow for 13-Weeks Ending 5/11/07

Figure 7 displays a relative strength momentum model using rate of change (ROC) data for the Select Sector SPDR exchange traded funds (ETFs). The method is based on one described by Timothy Hayes, CMT, of Ned Davis Research Group, in the book “The Research Driven Investor”. The average value for the 4-week, 8-week and 12-week rate of change (ROC) is used to rank the sectors. In this display I developed, the stronger ranked sectors shown have wider bands in an attempt to depict money flowing in to the ETF.

In the last 2-3 weeks, it appears both semiconductor (XSD-top band) and technology (XLK-orange band) ETFs have expanded, with a more moderate expansion in energy (XLE-grey, 3^rd from bottom) and financials (XLF-immediately above XLE). At the same time, basic materials (XLB-purple, 2^nd from bottom), consumer staples (XLP-purple, 7^th from bottom) and healthcare (XLV-aqua, 5^th from top) appear to be contracting.

Since the industrials (XLI) are holding steady while semiconductors and technology are expanding, it seems possible the NDX will follow the Dow and S&P 500 lead upward. This new look at sectors still requires some time and testing; however, relative strength in the NDX versus INDU in the short-term is a reasonable conclusion since INDU remains strong and flows into XLI steady.

Does this mean NDX is set to take off? Absolutely not—it is merely one potential outcome given the current market environment. Sector review will continue next week


Clare White, CMT
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
To see the other articles by this author, please click here.

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Chart Settings

SPX

1. Logarithmic and standard arithmetic settings.
2. A linear regression channel of approximately 4 years (3/31/2003 – 12/31/2006).
3. The Average Directional Indicator standard setting of 14 periods and a modified, faster setting of 9 periods for trend review.
4. 24 month (start: 10/30/87), 9 month (start: 9/30/1987) and 40 week cycle (11/30/1987).
5. Momentum assessment using a fast Stochastic with settings at 12, 5 and 5.
6. Additional horizontal lines incorporated into the Stochastics oscillator to reflect potential bullish zones (40 & 80) and bearish zones (25 & 65) [see “Stochastic Ranges” Technical Toolbox Articles from June 2005 for Connie Brown technique].
7. A fast Moving Average Convergence Divergence (MACD) with settings at 6, 13 and 4.
8. An S&P 100 (OEX) overlay chart.

INDU

1. Logarithmic and non-logarithmic settings.
2. Linear regression channels of approximately 12.5 years (6/20/94 – 12/31/06) & 3.5 years (9/30/03 – 3/31/07).
3. The Average Directional Indicator standard setting of 14 periods and a modified, faster setting of 9 periods for trend review.
4. 4 year (start: 7/30/34) & 9 month (start: 8/31/98) cycles.
5. Momentum assessment using a fast Stochastic with settings at 12, 5 and 5.
6. Additional horizontal lines incorporated into the Stochastics oscillator to reflect potential bullish zones (40 & 80) and bearish zones (25 & 65) [see “Stochastic Ranges” Technical Toolbox Articles from June 2005 for Connie Brown technique].
7. A fast Moving Average Convergence Divergence (MACD) with settings at 6, 13 and 4.
8. An S&P 100 (OEX) overlay chart.

NDX

1. Logarithmic and non-logarithmic settings.
2. A linear regression channel of approximately 4 years (revised, 3/31/03 – 3/31/07).
3. The Average Directional Indicator standard setting of 14 periods and a modified, faster setting of 9 periods for trend review.
4. 21 month (start: 12/30/94)), 9 month (start: 6/28/96) & 48-week cycle (start: 8/30/92).
5. Momentum assessment using a fast Stochastic with settings at 12, 5 and 5.
6. Additional horizontal lines incorporated into the Stochastics oscillator to reflect potential bullish zones (40 & 80) and bearish zones (25 & 65) [see “Stochastic Ranges” Technical Toolbox Articles from June 2005 for Connie Brown technique].
7. A fast Moving Average Convergence Divergence (MACD) with settings at 6, 13 and 4.
8. An S&P 100 (OEX) overlay chart.

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