SHORT-TERM MARKET TREND STRENGTHENS -- LONG-TERM TREND IS OVERSOLD AS WELL
NASDAQ 100 LEADING MARKET HIGHER... A number of positive chart things have happened this week. Tuesday's market rally came on good volume and very good breadth. It also came at a good time with so many market indexes testing major support at their 200-day moving averages. There are positive signs on relative strength grounds as well. The fact that the Nasdaq market has led this week's rally is a good sign. That's especially true when the large technology stocks in the Nasdaq 100 are leading the way as they are now. I've said many times that the Nasdaq usually leads the rest of the market -- both higher and lower. The QQQ/SPX relative strength line had been falling since January as the Nasdaq led the market lower. Since the end of March, however, the QQQ has been outperforming the S&P 500. The RS line has been rising even faster since the start of May. The QQQs are also the first of the major indexes to clear the 50-day moving average, which it did on Tuesday. Its four-month down trendline is still in effect however. But the short-term picture has improved for the QQQ and the rest of the market.
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S&P 500 SPDRs TEST 50-DAY LINE -- DAILY MACD LINES TURN POSITIVE... Chart 2 shows the S&P 500 SPDRs trading at a three-week high after a successful test of the 200-day moving average. It's now testing its 50-day moving average. A decisive close over that resistance line would add further confirmation to yesterday's upturn. The daily MACD lines have now turned positive for the second time since the end of March. That's another good sign. So is the stronger performance by small caps.
Chart 2
SMALL STOCKS ARE DOING BETTER... Another sign of increased confidence is seen in new leadership by small cap stocks. The SML/SPX ratio line has been rising for the last two weeks. The fact that small caps are doing better than large caps again is also improving market breadth. That's a good sign -- if it continues. Chart 4 shows the NYSE Advance Decline rising to a three-high after bouncing off its 200-day line.
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WEEKLY INDICATORS ARE OVERSOLD... Weekly indicators also offer some encouragement at this point. The weekly charts shown below include Bollinger Bands and Stochastics. The weekly Dow, Nasdaq, and S&P 500 are finding support at their lower Bollinger Band. At the same time, all three weekly stochastic lines are turning up from oversold territory near 20. That stochastic lines show the market to be in the most oversold position since last spring. Combine that with the presence of 200-day (or 40-week) moving averages and the longer-range picture looks even better. It means that the recent decline has reached a point where a new advance could start. That's why this week's upturn on the daily charts is so encouraging.
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ETF LEADERS... The next three charts show some Exchange Traded Funds (ETFs) that are showing good relative strength. The Internet Holders are nearing a test of the April high on strong volume. Bank Regional Holders have exceeded their 50-day average and late-April highs. Notice the rising relative strength line. The iShares DJ Select Dividend Index Fund has broken a three-month down trendline and has a rising relative strength line. The DVY is a basket of large stocks that pay dividends. The biggest holdings are in banks (38%), Electric Utilities (19%), Chemicals (10%), Tobacco (6%), and Insurance 5%.
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