OVERBOUGHT CONDITION WEIGHS ON MARKET -- ADX LINES TURN DOWN -- USING BOLLINGER BANDS TO FIND CHART SUPPORT
DOW BACKS OFF FROM 11000 ... Chart 1 shows some chart reasons why the Dow Industrials are pulling back. First of all, the Dow reached its spring high (10984) in an overbought condition. That's seen in the 9-day RSI line (top of chart) which moved into overbought territory over 70 for the first time this year. [The RSI is now testing the 50 level which is the first line of support. If 50 doesn't hold, the RSI could pull back to 30 which would signal a deeper correction]. If that happens, chart support should be evident along the summer highs near 10,700. The second sign of a top can be seen in the peak in the ADX line (bottom of chart). I recently explained that an uptrend is over-extended when the black ADX line moves above the green line as it did a couple of weeks ago. A correction is signaled when the black line turns down as it's done this week. We see this same pattern in virtually all of the major stock indexes which are also weakening.
Chart 1
NASDAQ 100 SHARES ARE ROLLING OVER... Chart 2 shows three ways to view Bollinger bands. The indicator on top of the chart (%B) shows the Bollinger bands as an oscillator. The upper line (1.00) is the top band and the bottom line (0.00) the lower band. The dashed middle line (0.50) is the 20-day average. Notice that moves over the upper line are often followed by market pullbacks. Moves below the bottom line often represent buying opportunities. The %B indicator shows the QQQQ pulling back from overbought territory and headed for a test of the .50 level (the 20-day average). Notice the tendency for the price to fall to the lower line if the .50 level (20-day average) is broken. The line under the price chart measures Bollinger band width (the spread between the two bands). That's useful to watch because the bands expand during a price trend and contract during a pullback or consolidation. The last peak in band width took place in early August and coincided with a Nasdaq pullback. It started jumping in early November as the Nasdaq turned higher. Band width is pulling back from the same level as the August peak. That's another sign of a short-term market peak. If the 20-day line doesn't hold, the next area of major support is at the lower band just above 40 which coincides with chart support long the August peak (blue circle).
Chart 2
S&P 500 SPDRS WEAKEN AS WELL ... The indicators applied to the daily chart of the S&P 500 SPDRs (SPY) are different, but the message is the same. The daily MACD lines are turning down for the first time since mid-November. The 12-day Rate of Change (ROC) oscillator is dropping back for a test of the zero line. Both imply short-term weakness. The first test of support for the SPY will take place at its 20-day average (125.32). If that doesn't hold, more substantial chart support is likely along the summer highs around 124. The ability of prices to stay over their summer highs will help determine if this is just a short-term pullback or something more serious.
Chart 3
