S&P 500 TESTING TOP OF SHORT-TERM TRADING RANGE -- A MOVING AVERAGE CROSSOVER SYSTEM -- ENERGY AND UTILITY BUYING HELPS STABILIZE MARKET

NO CHANGE IN SHORT-TERM TREND... Last Friday I showed the S&P 500 trading between support at its 400-day (80-week) moving average (blue line) and resistance at the red 200-day (40-week) line. I also suggested that the S&P needed a decisive close above 1200 to turn its short-term higher. A failed attempt at the 200-day line at mid-week kept the S&P in its October trading range. A 19-point rally on Friday, however, pushed it right up against that short-term resistance barrier again. A strong third quarter GDP report helped the market end the week on a strong note. Short-term indicators continue to show improvement. For example, the daily MACD lines have turned positive from the same level as the April bottom. That also suggests an oversold condition. Longer-term indicators have not changed however. The weekly MACD lines are still negative, while the monthly lines are still positive although just barely. Speaking of moving averages, one of our readers suggested that I look at a weekly combination that has a good historic track record. Let's do that.

Chart 1

13 AND 34 EMA LINES ARE STILL UP ... Following last Friday's market message, one of our readers suggested taking a look at the exponentially smoothed 13 and 34 week moving averages on the S&P 500. I had written about this moving average combination in my first book on technical analysis (1987), but haven't been following it too closely since then. Maybe I should have. After looking at the two lines, I have to admit their track record in calling market turns (and avoiding counter-market moves) has been very good. The two moving average lines are applied to the S&P weekly bars in Chart 2. These are exponentially smoothed as opposed to arithmetic averages and are used in combination. Trend signals are only given with the two lines cross. Although the S&P has traded beneath the (red) 34-week EMA twice this year, the (blue) 13-week EMA has stayed over the 34-week line throughout. Therefore, no sell signal has been given.

Chart 2

Chart 3

LONGER-TERM RECORD IS IMPRESSIVE ... In order to see the longer-range moving average crossings more clearly, I've plotted them alone in Chart 3. Only two crossings have taken place in the last seven years. The 13-week EMA crossed below the 34-week EMA in the second half of 2000 to give a sell signal. . An upside crossing in the spring of 2003 gave a buy signal. No sell signal has been given since then. What's impressive about this combination is that the lines didn't cross during intermediate corrections. In other words, they weren't faked out by counter-trend moves. [Only five crossings have taken place in the last ten years]. That's the hallmark of a superior trading system. It gets you in early and doesn't get you out too soon.

Chart 4

CONVERTING BACK TO DAILY EMA LINES... Chart 4 shows what those two weekly lines look like when converted to daily lines. In order for a long-term sell signal to occur, the blue 65 day EMA must cross below the red 170 day EMA. So far that hasn't happened which means that the major uptrend is still intact. I would be remiss if I didn't point out that the 13- and 34- week spans are Fibonacci numbers which have long been favored by professional traders. Last week I plotted an 80-week EMA line on the S&P. Fibonacci followers would have preferred an 89-week EMA. They both work pretty well. The S&P is still above both support lines. It's never too late to learn a new indicator or be reminded of the value of an old one.

BOUNCE IN ENERGY AND UTILITIES HELPS STABILIZE MARKET ... Earlier in the week I showed the energy and utility groups finding new support at their 200-day moving averages. I suggested that both groups had been dropping together and had reached an oversold level where new buying could be expected. I also suggested that buying would help stabilize the market. Not because rising energy prices are good, but because falling energy stocks have hurt the market during October. Chart 5 shows what both groups look like at week's end. Energy's 2.7% gain and the utilities' 2.3% made them Friday's two strongest market groups. New buying in both groups helps the odds for a fourth quarter market bounce.

Chart 5

Chart 6