NASDAQ REBOUNDS WITH GAP -- MEASURING RELATIVE STRENGTH -- DISK DRIVE STOCKS POWER TECHS HIGHER -- FINANCE LEADS NY COMPOSITE TO ALL TIME HIGH -- RUSSELL MIDCAP ETF HITS ALL TIME HIGH -- USING RSI FOR TREND IDENTIFICATION
NYSE COMPOSITE AND NASDAQ CONTINUE THEIR BATTLE... Today's Market Message was written by Arthur Hill. John Murphy will be back tomorrow. - Editor
Two weeks ago I wrote that the Nasdaq was holding up well and outperforming the NYSE Composite. The Nasdaq held firm the first five trading days of the year while the NYSE Composite sank below 9000. The NY Composite rebounded and both indices got on the same page with a move higher from January 10th to 12th. This joint effort did not last long as the Nasdaq peaked on 12-January and moved sharply lower the next six days. In contrast, the NYSE Composite held its gains and broke to new highs this week. The Nasdaq is making a comeback today and these two key indices are getting back in sync. The Nasdaq gapped up on the open and broke short-term resistance. This move reinforces support around 2420 and the gap is short-term bullish as long as it holds. A little leadership from Technology would be a boost for the market as whole.
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COMPARING TWO SECURITIES... Another way to compare the performance of two securities is with the price relative, which plots the ratio of two securities. In this example, the price relative is the Nasdaq/NYSE Composite ratio and this shows the performance of the Nasdaq relative to the NYSE Composite. The Nasdaq is outperforming when the ratio rises and underperforming when the ratio falls. As you can see, money favored the Nasdaq from 3-January to 12-January and the NYSE Composite from 12-January to 23-January. The price relative surged today and the Nasdaq is coming back into favor.
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DISK DRIVE STOCKS LEAD TECH REBOUND... Within Technology and the Nasdaq, the Amex Disk Drive Index ($DDX) led the way with a big gain. DDX remains short of a breakout, but today's surge reinforces support and I would look for a move above the early January high to break flag resistance. Seagate Technology (STX) is leading the group with a gap and consolidation breakout on huge volume. The breakout is worthy of a 52-week high and MACD moved above its signal line. Western Digital (WDC) is not quite as strong as Seagate, but the stock gapped up and moved higher as well. Look for a break above early December high to clear the way for a challenge to the February high (24.70).
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NEW ALL TIME HIGH FOR THE NYSE COMPOSITE... While the Nasdaq is getting most headlines today, the NYSE Composite quietly moved to a new all time high on Wednesday. This is one of the broadest market indices out there. The NYSE Composite includes large-caps, mid-caps and small-caps. Moreover, all sectors are represented in this index and a new all time high bodes well for the market as a whole. The Finance SPDR (XLF) represents the biggest sector in the NYSE Composite and this ETF hit a new 52-week high today. Though not as big as Finance, the Materials SPDR (XLB) also recorded a new high today and is leading the market.
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RUSSELL MIDCAP ETF HITS NEW HIGH TOO... The Russell MidCap iShares (IWR) represents another broad index that is hitting a new high today. The ETF is having a good year in 2007 with a flag breakout at 101 and a new high today. This chart shows nothing but higher highs and higher lows, which is the definition of an uptrend. The January low is now key support and the uptrend is firmly in place as long as this level holds.
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USING RSI FOR TREND IDENTIFICATION... Overbought and oversold readings can be important for RSI, but traders and investors can also use this popular momentum oscillator for trend identification. Think of RSI as a football game between the bulls and the bears. The indicator is a bound oscillator that fluctuates between 0 and 100 with 50 as the mid point. The 50 yard line (50) is in the middle and this defines the balance of power. The bulls have the edge when RSI is above 50 and the bears have the edge when RSI is below 50. Expect an uptrend when the bulls have the edge and a downtrend when the bears have the edge.
Now let's apply this logic to the S&P 500. RSI was below 50 most of June and the bears had the edge. The bulls pushed RSI above 50 in late June and this was a sign that the game was turning (trend reversing). The bears fought back in July by pushing RSI back below 50, but RSI remained well above the June low. The balance of power shifted towards the bulls when RSI moved back above 50 in mid July and above 60 in mid August (yellow box). 50 acts as support in an uptrend and RSI bounced off this level in late November and early January. As long as RSI and SPX hold their early January lows, the bulls have a clear edge and the medium-term trend is firmly up.
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