STOCKS REMAIN STRONG -- QQQQ HEADS TOWARDS CHANNEL TRENDLINE -- SPY TAGS UPPER CHANNEL TRENDLINE -- NYSE BREADTH BECOMES OVERBOUGHT-- NASDAQ BREADTH REACHES RESISTANCE -- HIGH-LOW INDICATORS SURGING

A BIG WEEK FOR STOCKS...

EDITOR'S NOTE: John is travelling this week. Today's Market Message was written by Arthur Hill of TDTrader.com. John will be back next week.


The bulls were out in force this week. The Dow and NYSE Composite reached all time highs, the Nasdaq moved to its highest level since February 2001 and the S&P 500 moved to its highest level since November 2000. Despite these milestones, a number of key indices are lagging and not faring quite so well. The Russell 2000 and S&P MidCap Index were late to the party and have yet to exceed their May highs. However, these May highs represent all time highs and both indices are within striking distance. Despite this minor discrepancy, the big trends are, by definition, up. Today, I will look at the long-term charts for QQQQ and SPY to see how far they have run and how much might be left. In addition, I will look at some breadth indicators for the NSYE and Nasdaq, which are now bullish. I will show what it took to turn these breadth indicators bullish and what it would take to turn them bearish.

Chart 1

QQQQ HAS SOME ROOM TO RUN... Even though the Nasdaq 100 ETF (QQQQ) is substantially higher since mid July, the weekly chart shows some room to run. In addition, a back-of-the-envelope comparison to the Aug-Dec 2004 advance shows that it is certainly possible. On Chart 2, the big pattern at work is a rising price channel. The upper trendline projects a move to around 45.5 by the end of the year. Looking back at the Aug-Dec 2004 advance, we can see that QQQQ rose 25% in 16 weeks without a correction. The current advance has risen 20.7% in 14 weeks. A 25% rise would add another 2-3 points and extend to around 44.5. Even though QQQQ is overbought, it could remain overbought a little while longer and reach the 44-45 region. Stranger things have happened, even in Detroit.

Chart 2

SPY REACHES UPPER CHANNEL TRENDLINE ... On Chart 3, the S&P 500 ETF (SPY) tagged the upper channel trendline this week. For the channel, I drew the lower trendline first and the upper trendline is based on (and parallel to) this trendline. It is a simple channeling technique and the upper trendline extension acts as a target. Now that SPY has reached this trendline, the ETF is getting overextended and needs to work off this condition with a correction or consolidation.

Chart 3

NYSE A-D BREADTH IS OVERBOUGHT ... Chart 4 shows the 50-day simple moving average for NYSE Advances Minus Declines ($NYAD). This indicator can tell us when breadth is bullish, bearish, overbought or oversold. Basically, I consider breadth bullish when the indicator is positive and bearish when it is negative. On the most recent run, the indicator broke into positive territory in late July and exceeded +350 this week. The trend is clearly up and strong, but this is also the area where the moving average peaked in July-August 2005 and January 2006 (red boxes). Notice that the indicator peaked and declined well ahead of the peaks in the NYSE (September 20005 and May 2006). The indicator has yet to turn down and it would take a move into negative territory to turn bearish on breadth.

Chart 4

NASDAQ A-D BREADTH AT EXTREME TOO... Chart 5 shows the 50-day simple moving average for Nasdaq Advances Minus Declines ($NAAD). In contrast to the NYSE, the Nasdaq Advance-Decline statistics have a negative bias. This is probably because the Nasdaq listing requirements are not as strict and there are more "questionable" companies listed on the Nasdaq. Taking this into consideration, I lowered the bullish-bearish threshold for the indicator. The 50-day moving average must cross above --100 to be considered bullish and below --100 to be considered bearish. Overbought and oversold readings are based on prior extremes. This breadth indicator bottomed in July and surged above --100 in late August. It remains in an uptrend and is currently near its July 2005 and January 2006 highs. Based on these prior peaks, Nasdaq breadth is getting overbought. However, it is still bullish and I will wait for the indicator to move below --100 before turning bearish on Nasdaq breadth.

Chart 5

NYSE HIGH-LOW INDICATOR SURPASSES JANUARY PEAK ... The New Highs Minus New Lows indicator is also good for measuring internal strength and weakness. The indicator lags because it usually takes a sustained move to forge new 52-week highs and new 52-week lows. I applied a 10-day exponential moving average to smooth the series. A move into positive territory is bullish, a move into negative territory is bearish and I also look for extremes. The NYSE High-Low indicator bottomed in late June and moved into positive territory in late July. The indicator never looked back and raced above +275 in October. The trend is clearly up and bullish, but the indicator is near levels that marked prior peaks in July-August 2005 and January 2006. This is overbought territory and this argues for caution. The indicator would not turn bearish unless it moves into negative territory.

Chart 6

NASDAQ HIGH-LOW INDICATOR STILL STRONG ... The Nasdaq High-Low indicator bottomed in mid July and broke into positive territory in late August. The indicator remained positive throughout September and raced above +100 in October. It has yet to reach overbought levels (red boxes) and remains bullish overall. Notice that the Nasdaq High-Low indicator bottomed almost a month after the NYSE High-Low indicator. This showed relative strength in the NYSE stocks and helps explain why the NYSE Composite recorded a new all time high on 16 October.

Chart 7