NYSE ADVANCE-DECLINE LINE HITS NEW HIGH -- DOW CLOSES OVER 11K FOR SECOND DAY -- TRACKING 50-DAY AVERAGES ON STOCKCHARTS
ADVANCE-DECLINE LINE HITS NEW HIGH ... Back in December I expressed concern about the fact that the NYSE Advance-Decline line remained beneath its August/September highs which was creating a "negative divergence" with the NYSE and S&P 500 indexes which had broken through those highs during the fourth quarter. That negative divergence has been resolved on the upside. The explosive market rally during the first week of the new year pushed the NYAD to a new record high. I was also concerned about the small number of NYSE stocks hitting new 52-week highs. That's also improved. Chart 2 shows the NYSE New Highs-New Lows line climbing to a six week high. The NYHL is still trading beneath its July high, but at least it's started to move in the right direction. Another potential negative divergence was resolved with yesterday's Dow close over 11,000.
Chart 1
Chart 2
DOW CROSSES 11,000 ... Up until yesterday, the Dow Jones Industrial Average was the only market measure that had failed to hit a new 52-week high. In yesterday's trading, however, it broke through its spring 2005 high at 10984 to achieve a bullish breakout. It also closed above 11,000 for the first time in four and a half years. The weekly bars in Chart 3 show the Dow trading over last year's high. I chose weekly bars instead of daily ones for a reason. Although a daily close above a major resistance barrier is a good sign, a weekly close is even better. I point this out only because the Dow spent today absorbing some minor profit-taking around the psychological 11K level. Even so, little chart damage was done and momentum still appears to favor the upside. Having said that, a Friday close over 11K would be a lot more convincing than a Monday close over that barrier. If the Dow can hold this week's breakout, the next upside target would be the spring 2001 high at 11350 which is 3% from current levels.
Chart 3
DOW IS OVERBOUGHT ... Part of the reason for the Dow's lack of upside follow-through today may be due to the fact that it (and other market indexes) are in a short-term overbought condition after the steep runup over the last week. The 20-day Commodity Channel (CCI) Index in Chart 4 is back over 100 which is short-term overbought territory. While the Dow didn't show much upside follow-through, it didn't give back much either. The horizontal bar in Chart 4 is the 10984 breakout point. The good news is that the Dow ended above that support line today after withstanding some early selling.
Chart 4
TRACKING 50-DAY AVERAGES... I got a lot of feedback on last week's comment on trading advice. One reader asked why I don't point out market indexes while they're testing their 50-day moving averages instead of waiting for upside breakouts. In the case of major market indexes I usually do. Last Tuesday, for example, I mentioned the major stock indexes bouncing off their 50-day moving averages in that day's headline (January 03, 2006). During the December selloff, I wrote that the major averages would test their 50-day averages and they did. I also pointed out when gold was testing its 50-day line a month ago before turning back up again. But there are lots of times that I don't point out an industry or sector index that's testing a 50-day line. There are simply too many to comment on. In the case of the SMH shown below, I didn't. But you shouldn't need me to point these things out. Stockcharts.com includes 50-day lines on all of our daily charts. That's so that you can see them so easily. And you should be monitoring the moving average lines because they're important. The rule of thumb for the 50-day average is this. During a pullback, a stock or an index should bounce off its 50-day line. If it does, that's another buying opportunity. That was the case with the SMH. If it closes below the 50-day line, and stays below it for a few days, it may be time to think about selling. It's that simple. The beauty of Stockcharts is that you can see the moving average lines for yourselves with little or no help from me.
Chart 5
