RESPONSES TO QUESTIONS ON MCCLELLANN OSCILLATORS, DOW THEORY WEEKLY SIGNALS, AND GOLDEN CROSSES -- THE BOTTOM LINE IS THAT GLOBAL STOCKS APPEAR TO BE ENTERING A DOWNSIDE CORRECTION -- TECHNICAL SIGNS SUGGEST THE SPRING RALLY HAS PROBABLY ENDED
MCCLELLAN OSCILLATORS ARE NEGATIVE ... One of our readers points out that the McClellan Oscillators for the NYSE (NYMO) and the Nasdaq (NAMO) are both in negative territory and are showing negative divergence from their price indexes. The reader is right on both counts. On May 16, I pointed out the drop below the zero line (black circle) by the NYMO and warned of some corrective action as a result. Chart 1 shows the NYMO moving back above its zero line briefly in early June before falling back below it last week. The NAMO in Chart 2 did the same. The result in both cases was a negative divergence between the McClellan Oscillators (black lines) and their respective price indexes. That's normally a sign of some impending price weakness. The NYMO is still well above oversold territory near -100 which suggests there's more selling to come.
Chart 1
Chart 2
WEEKLY DOWN THEORY SIGNALS ... Another reader asked why I used daily charts for Dow Theory signals instead of weekly charts since that theory is supposed to spot long-term signals. I used the daily chart because I wanted to show the short-term "negative divergence" between the Dow Industrials and the Dow Transports. Although daily charts can also be used to spot major buy and sell signals, weekly charts are preferable. The weekly bars in Chart 3 show the Dow Industrials breaking support in January 2008 and giving a major bear sign (red arrow). The bearish pattern of lower highs and lower lows is still intact. In order for a major buy signal to occur, the Dow has to close decisively above its January peak at 9088 (and the Transports have to do the same). I showed that resistance level on the daily chart, but it is clearer on the weekly version.
Chart 3
GOLDEN CROSSES ... A third reader asked about "Golden Crosses". For those not familiar with that term, a Golden Cross takes place with a 50-day moving average crosses above a 200-day average. Not surprisingly, it's a bullish sign (although that sign is stronger if the 200-day line is rising). A Golden Cross has taken place in the Nasdaq Composite as shown in Chart 4. Other Golden Crosses have taken place in the Nasdaq 100 and the S&P 400 MidCap Index as well as the Materials SPDR (XLB), the Technology SPDR (XLK), and Consumer Discretionary SPDR (XLY) which have all been market leaders. Not so in other major market indexes like the S&P 500 (Chart 5) and the Dow Industrials (Chart 6). That represents another important test for the market. A downside correction from here could prevent Golden Crosses from taking place in several market and group indexes.
Chart 4
Chart 5
Chart 6
GOLDEN CROSSES IN EMERGING MARKETS... Another reader asked about the Golden Cross in the Chinese market and what that told us about global leadership. Actually, Golden Crosses have taken place in all four BRIC emerging market ETFs (Brazil, China, India, and Russia). That tells us where global leadership has been coming from and will probably continue to do so (as I've suggested in previous messages). I happen to believe, however, that all of those markets are over-extended and in need of some corrective action. Chart 7 shows China iShares (FXI) having doubled in price and starting to pull back from overhead resistance at the March 2008 low near 40. Daily RSI and MACD lines are starting to weaken from overbought territory. That suggests to me that emerging markets have rallied too far too fast and are also due for some profit-taking. When global leaders (emerging markets) start to stumble, global laggards (like the US) usually stumble along with them.
Chart 7
S&P 500 CONTINUES TO WEAKEN... The spring rally has probably ended. That view is predicated on the fact that the S&P 500 is starting to back off from its January high (having completed a five-wave advance from its March low). In addition, daily RSI and MACD lines are turning down (see arrows). I expect the May low to be retested and we'll see what happens from there. It's quite likely that we've seen the highs (950) and the lows (675) for the next few months. A pullback from its January high also leaves open the possibility for a "head and shoulders" bottom that I wrote about in previous messages. For longer-term investors, a pullback from here would offer better buying opportunities at lower levels. Shorter-term traders should start taking some profits after a 40% rally.
Chart 8
