NO FRIDAY FOLLOW-THROUGH AS TESTING PROCESS CONTINUES -- BUT LONG-TERM INDICATORS STILL LOOK TOPPY

NYSE STILL SITTING ON 200-DAY LINE ... Friday's market action didn't tell us much about the staying power of Thursday's afternoon bounce. Market averages closed modestly lower in lighter trading volume. The good news is that the NYSE Composite Index remains on top of its 200-day moving average and remains in a short-term oversold condition. The bad news is that weekly indicators remain in negative territory.

Chart 1

WEEKLY CHART STILL LOOKS TOPPY ... Chart 2 overlays MACD lines on weekly bars for the NYSE Index. This is the fourth week in a row that the weekly MACD lines have been in negative territory. And the MACD histogram bars fell even further. That means that the intermediate trend weakened even more. Until that situation shows some improvement, any short-term market bounce has to be viewed with some skepticism. While 200-day lines held this week for several market indexes, longer-term momentum still appears to be to the downside. That's pretty much the case with stock markets around the world.

Chart 2

WORLD STOCK INDEX TESTS 200-DAY LINE ... The next chart shows the Dow Jones World Stock Index bouncing off its 200-day moving average on Thursday. [Although not shown here, most markets bounced on Friday]. While a short-term bounce may continue from that long-term support line, the bigger question is what happens after that. The monthly bars in Chart 4 aren't very encouraging. For one thing, they show that the DJW is backing off from major resistance formed in 2000. The 14-month RSI line has reached overbought territory over 70 for the first time since the bull market began in 2003. The 12-month Rate of Change (ROC) line is much weaker than the price action. If you examine the history of the (black) ROC line, you'll see that it led the market lower in 2000 and then led it higher in 2003. The fact that the ROC is currently weaker than the price trend suggests that long-term bullish momentum is weakening. The monthly MACD lines, which turned positive at the start of 2003, are still in positive territory. But they're getting dangerously close to turning negative. [The weekly MACD lines have already turned down]. This is very similar to the chart picture that we see in the states. Although the short-term trend is in some doubt at the moment, longer-range trends continue to look toppy.

Chart 3

Chart 4

UTILITIES BENEFIT FROM BOND BOUNCE ... When stocks selloff, money usually flows into bonds. That's been the case recently. Money also tends to flow into utilities which are often view as a stock equivalent of bonds. That's because utilities are sensitive to the direction of bond prices and are a defensive market sector. With all the market turmoil this week, utilities continue to gain ground. Chart 5 shows the Dow Utilities having a relatively strong week. Other defensive groups that held up okay this week were banks, consumer staples, and healthcare.

Chart 5