MARKET HAS LOSING WEEK AND REMAINS ON THE DEFENSIVE-- INTERNET AND SOFTWARE STOCKS WEIGH ON NASDAQ -- GE HELPS KEEP DOW OVER 200-DAY AVERAGE -- GOLD AND OIL SHARES CLIMB
MONTHLY MACD POSITIVE BUT WEAKENING... This is a good time to stand back and try to put things into a longer-term perspective. First of all, let's see why the 2004 rally has been stalled. The monthly bars in Chart 1 show that the S&P 500 ran into major chart resistance at its early 2002 peak. The horizontal blue lines also show that the S&P had retraced 50% of its 2000-2002 bear market. The monthly stochastic lines also show an overbought condition over 80. That was a logical spot for the cyclical bull market to stall. And stall it has -- for the entire first half of 2004. The monthly MACD lines have been converging since the start of the year (which usually reflects loss of upside momentum), but are still in positive territory. The last sell signal was given near the start of 2000. The last buy signal was given in the spring of 2003.
Chart 1
WEEKLY MACD STILL NEGATIVE... The weekly S&P 500 bars give a better view of chart resistance along the early 2002 peak near 1175 and the sideways action during 2004. So far, no serious chart damage has been done. The S&P, however, is sittting just above its (red) 40-week moving average. Right now, the intermediate trend is neutral. That would quickly shift to negative, however, if and when the 40-week line is broken. The weekly RSI line has been dropping all year and now sits at the mid-point of 50. That's an important level. Intermediate corrections (or consolidations) usually find support near 50. If that level is violated, however, a further drop to 30 is the usual result. The weekly MACD lines turned negative earlier this year -- and are still negataive. A study of the lines over time show that markets don't advance much with a negative MACD alignment. Until the weekly lines turn positive, a cautious stance is the best course.
Chart 2
INTERNET AND SOFTWARE STOCKS PULL NASDAQ LOWER... Despite a Friday bounce, technology was the biggest weekly casualty. Two of the biggest reasons were heavy selling in Intermet and Software stocks. The Internet Holders (HHH)tumbled on Thursday on massive volume and broke the 50-day moving average. Its relative strength line has also turned down. The Software Holders (SWH)also tumbled at mid-week on very heavy volume and are testing their 2004 lows. It's too soon to tell if Friday's low-volume rebound is enough to turn things around. Earlier today I showed the Semiconductor Index also rebounding off its spring low. Bargain-hunting in the latter two groups provided a bounce in the Nasdaq market at week's end. It wasn't enough, however, to get the Nasdaq Composite or Nasdaq 100 indexes back over their 200-day lines.
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GOLD AND OIL STOCKS GAIN GROUND ... While the rest of the market lost ground, gold and oil stocks attracted more buying. The XAU Index closed at a new three-month high on the back of rising gold prices and a falling dollar. That also gave a boost to basic material stocks. With oil back over $40, energy stocks were the week's top sector. The iShares S&P Global Energy Sector Index Fund closed at a new 52-week high.
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GE KEEPS DOW ABOVE 200-DAY LINE ... Friday's bounce wasn't all that impressive. The gains were small and the volume light. Even so, it was enough to keep the Dow Industrials over their 200-day moving average. At the same time, it's still below a falling 50-day average. The red volume bars show that there was a lot more downside than upside volume for the week, which isn't encouraging. A bounce in GE got the day off to a good start and helped keep the Dow afloat. While we were happy to see the week end on a positive note, the testing process is far from over and will continue into next week. Caution is still the operative word.
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