LONGER TERM INDICATORS SUGGEST OVERBOUGHT MARKET AND SOME LOSS OF UPSIDE MOMENTUM -- INITIAL SUPPORT LEVELS, HOWEVER, ARE STILL HOLDING

OVERLAYING RSI ON PRICE BARS ... Most chartists place indicators like RSI either above or below corresponding price bars. I like to overlay the indicator right on the price. To me, that makes for easier comparison between the two lines. Take Chart 1 for example. It overlays the 14-week RSI line right on the weekly bars for the S&P 500. [Stockcharts allows you to place an indicator above, below, or "behind" the price. Behind price overlays it on the price bars as in Chart 1]. You can see that the RSI line recently reached overbought territory (over 70) for the first time since the start of 2004. And it's starting to slip. One advantage of plotting the RSI line this way is that the major market turns stand out more clearly. Actually, there are four on the chart. The RSI bottomed in late 2002 with the price (green circle). As the S&P 500 retested that low in the spring of 2003, the RSI line was already crossing over 50 (blue circle) which was a major buy signal. The RSI reached overbought territory at the start of 2004 (first red circle). It's just done it again (second red circle). That puts the market in the most dangerous (overextended) level in three years.

Chart 1

WEEKLY MACD LINES ARE WEAKENING ... Chart 2 overlays the MACD lines (and histogram bars) over a weekly chart of the S&P 500. The weekly MACD lines turned positive last summer as the market rally began. They've come dangerously close to the previous peak formed at the start of 2004 and are starting to converge. A downside crossing by the two lines would signal market weakness. The blue histogram bars plot the difference between the two MACD lines. You can see the histogram bars falling. A drop below the zero line would be a negative market sign. [Crossings above and below the zero line by the histogram bars coincide with positive and negative crossings of the two MACD lines]. The daily MACD lines are already negative.

Chart 2

BOLLINGER BANDS ARE CONTRACTING ... Chart 3 shows three variations of weekly Bollinger bands with the S&P 500. First the actual bands themselves. The S&P crossed over the dashed middle line (the 20-week moving average) during August (blue circle) to turn its trend upward. It hugged the upper band for most of the last six months. It's starting to slip however. That can be seen more clearly by the %B on the top of Chart 3 which plots the bands like an oscillator. [%B uses the 20-week average as the middle line (0.50). Readings over 1.00 put the price at the upper band, but also represents an overbought condition]. The dropping %B shows some loss of upward momentum. The trend will remain up, however, as long as prices remain above the 20-week average (0.50 line). But that support line (currently at 1386) may be retested. The indicator at the bottom of Chart 3 (Bollinger band width or BB) tells us whether the bands are expanding or contracting. A rising BB line reflects expanding bands which suggest a continuing uptrend. The recent drop in the band width, however, implies a likely period of correction or consolidation.

Chart 3

A SHORTER TERM LOOK ... Chart 4 compares the 14-day RSI line to the S&P 500. The good news is that the RSI remains above the 50 level. Arthur Hill pointed out on Wednesday that the 50 level (green line) usually acts as support during minor pullbacks. The bad news is that the successive peaks in the RSI have been declining (red line), which suggests loss of upside momentum. Despite that negative warning, the S&P ended the week above its 50-day moving average (at 1413) and above its January intra-day low at 1403. It would have to close below that January low to turn its short-term trend negative. The point & figure boxes in Chart 5 show essentially the same picture. The uptrend that started during August is still intact. The S&P did suffer a downside reveral during the week. Chart 5, however, requires a close at 1400 or lower to trigger a p&f sell signal. In summary, the market bent a bit this week, but didn't break. I'd still suggest keeping a close eye on initial support levels just in case. That's what they're there for.

Chart 4

Chart 5