WATCHING MOVING AVERAGE LINES
STILL ON NASDAQ ALERT... Last Thursday, I talked about how the Nasdaq was beginning to look toppy -- owing primarily to the size of its yearlong advance, its proximity to major resistance near 2000, and the fact that its weekly indicators were overbought. I also talked about keeping an eye on its 20-week moving average line. Before getting back to the moving average lines, let's look at a couple of other Nasdaq weekly indicators. The lines on the top of the chart show the Average Directional Index (black ADX line) compared to the +DI (green) and -DI line (red). When the green line is over the red line (as it is now) the trend is positive. That's been the case for six months. However, the two lines are starting to converge. Notice that the black ADX line is now trading above the green line, which is a caution signal that the trend is over-extended. The ADX line also appears to be turning down. A downturn in the ADX line is usually a sign that a trend is ending. That seems to confirm new signs of weakness in some of our other technical indicators. The weekly MACD lines along the bottom are close to turning negative for the first time in a year. Another down week would probably turn them negative. All the more reason to keep on the alert for a possible intermediate top in the Nasdaq market. I talked last Thursday about protecting existing profits. One way of doing that is by watching moving average lines.
Chart 1
WATCH THE 50- AND 100-DAY LINES... The 50-day moving average carries a lot of importance. A close beneath that line is often a signal to sell a market. The daily chart shows the Nasdaq testing the 50-day line last Friday. The green line is the 100-day moving average. That's also important. I mentioned last Thursday that the 20-week moving average was an important support level. That translates to a 100-day line. That line also coincides roughly with chart support at the late September low. A break of either (or both) of those levels would be a more serious sign of weakness. Last week's heavy downside volume -- and the fact that daily MACD lines have turned negative --aren't good signs. A number of major stock averages --- including the Dow, the S&P 500, and the Russell 2000 -- are also in the process of testing their 50-day averages.
Chart 2
NASDAQ LOSING ITS EDGE?... One of the indicators we watch very closely is the Nasdaq/NYSE ratio. That's because a rising ratio signals Nasdaq leadership. That's when the market is usually the strongest. Bad things happen when the Nasdaq loses its leadership edge. The ratio line has been flattening over the past month. That's a caution sign. However, it hasn't broken down. To really signal trouble, the Nasdaq/NYSE ratio would have to break its September low. That hasn't happened yet. If it does, we'll turn even more cautious.
Chart 3
MONEY MANAGEMENT UPDATE... Since our MurphyMorris Money Management update last Tuesday, some of our trend-following indicators have weakened. They haven't turned negative however. But we're watching them very closely for any more signs of deterioration. Our fund positions are also being tested. They haven't reached the sell point yet, but are getting close. There are only two outcomes during a market correction. A market hits our sell criteria or it doesn't. If it does, we sell. If it doesn't, we don't. There's a lot to be said for simplicity. Our techically-driven Decision Model doesn't predict. It just follows the rules and dictates our actions. Or, better yet, the market does.
