Persistent short-term weakness has led to bearish turns in some intermediate-term indicators. What observations can be made to assess implications for the longer-term trend? To properly frame such a question time frames need to be defined.

• Short-term: days to weeks (daily chart)
• Intermediate-term: weeks to months (daily & weekly charts)
• Long-term: months to years (weekly & monthly charts)

The top image for this article does a good job of reminding us that the relative strength in the NASDAQ Composite (COMPQ) and the NASDAQ-100 (NDX) since 2009 has a little more to do with the extent of the tech bubble correction than pure bullishness in them. While the financial sector heavy Dow Jones Industrial Average^SM (INDU) and the S&P 500^® Index (SPX) made new highs in 2007, COMPQ and NDX reached their peaks in 2000. In the event a new cyclical bear is developing, traders should consider the relative strength and weakness that existed in different indexes and sectors during previous cycles.

As a last look at the four weekly index charts introduced last week, the current weakness on an intermediate-term basis is assessed to gauge potential implications for the longer-term. Be sure to consider how relevant these timeframes are to you and decide what charts and indicators you want to view to refine the assessment for your trading.

Figures 1 through 4 provide weekly charts for each index as of Friday, Nov 16, 2012. When assessing these views, consider the implications of index construction if appropriate. Chart specifications are included prior to each image.

Weekly COMPQ Chart Specs

• 1-Year Linear Regression Channel (from 7/2/2010 to 8/19/2011) extended to right
• 4-Year Linear Regression Channel (from8/15/2003to8/14/2007) extended to right
• 10-Week, 40-Week Exponential Moving Averages [EMA]
• Moving Average Convergence-Divergence (MACD: 19, 39, 9)
• Relative Strength Comparison versus the NYSE Composite

Figure 1 COMPQ Weekly Chart as of 11/16/12

COMPQ surpassed 2007 levels in 2011 as it moved into its previous long-term upward trending regression channel. Failure to firmly establish price action in this channel, accompanied by a breakdown out of its more recent bullish channel, are signs of weakness in the longer-term bullish trend. The 18-month divergence in MACD which is geared towards the longer-term trend (slow settings at 19, 39, 9) makes conditions ripe for a more meaningful correction for COMPQ.

Weekly NDX Chart Specs

• 1-Year Linear Regression Channel (from 7/2/2010 to 8/19/2011) extended to right
• 4-Year Linear Regression Channel (from3/31/2003to3/1/2007) extended to right
• 10-Week, 40-Week Exponential Moving Averages [EMA]
• RSI (14, 9) with 9-week SMA and Cardwell Ranges [bullish, 40-80 & bearish, 20-60]
• Average Directional Index with Directional Movement (ADX, +/-DI: 14)

Figure 2 NDX Weekly Chart as of 11/16/12

The NDX has most definitely benefitted from AAPL strength since the 2009 low, particularly in 2012. The stock has evolved into a 17.5% weight for NDX (modified cap-weighted calculation) and reached an all-time high in Sep 2012. Recent weakness in the stock has coincided with drop of NDX out of its more recent bullish regression channel. The next important area of support for NDX is the middle regression channel line of the older, longer-term bullish regression channel.

With RSI moving below the 40 level into a bearish range (20-60) and bearish directional movement gaining strength, conditions favor support being broken at this time. It is possible NDX slows at this level; however, it’s important for it to do so in the next week or two. A quicker break of the regression line favors a move towards the lower boundary line of the channel. As a general comment, renewed strength in AAPL may delay a decline in NDX; however, it won’t reverse it if a broad market sell-off occurs.

Weekly NYSE Composite Specs

• 1-Year Linear Regression Channel (from 7/2/2010 to 9/23/2011) extended to right
• 10-Week, 40-Week Exponential Moving Averages [EMA]
• Moving Average Convergence-Divergence (MACD: 12, 26, 9)
• Average Directional Index with Directional Movement (ADX, +/-DI: 9)

Figure 3 NYA Weekly Chart as of 11/16/12

NYA is the broadest of the indexes assessed in this article series. In 2012 this index failed to surpass 2011 highs and this past week downward directional movement [–DI] accelerated to cross above positive directional movement. This occurred with a break of its 40-week EMA and the second week of a bearish cross in MACD.

Since the move out of the 2009 low occurred at a more sustainable pace, NYA remains in its bullish regression channel. The current momentum picture favors a move down to test the lower boundary line of the channel and a break of this level may be the clearest indication that a longer-term decline is underway.

Weekly INDU Chart Specs

• 1-Year Linear Regression Channel (from 7/2/2010 to 9/23/2011) extended to right
• 4-Year Linear Regression Channel (from 3/31/2003 to 3/1/2007) extended to right
• 10-Week, 40-Week Exponential Moving Averages [EMA]
• Moving Average Convergence-Divergence (MACD: 19, 39, 9)
• On Balance Volume [OBV]

Figure 4 INDU Weekly Chart as of 11/16/12

Although the cyclical bull has been persistent since 2009, expanding the view displays an advance that has been weakening in 2012. This is occurring with a persistent divergence in MACD and a second weekly close below its more recent upward trending regression channel. In addition, volume is confirming the decline with OBV peaking in September and continuing to head lower. A move below the Jun 2012 low for INDU will result in a longer-term bearish outlook for the index. OBV will also be monitored.

Traders may want to view longer-term charts on a log-scale, which unfortunately is not conducive to the inclusion of regression channels.

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

Questions for Clare? Please visit the discussion board on the homepage of Optionetics.com.