FIBONACCI RETRACEMENTS REVISITED - SPY ADVANCES WITHIN CHANNEL - VOLUME FAILS TO IMPRESS, BUT PRICE DOES - AD VOLUME LINES HIT NEW HIGHS - NEW HIGHS EXPAND IN DECEMBER-JANUARY

FIBONACCI RETRACEMENTS REVISITED... Link for todays video. Wednesdays Market Message triggered a number question regarding my decision to base retracements on the decline from May 2008 to March 2009. Chart 1 shows the S&P 500 ETF (SPY) with the Fibonacci Retracements Tool based on this decline. Representing the S&P 500, SPY can be viewed as the benchmark for the stock market. I chose this May-March decline for two reasons. First, it was the most immediate prior decline. Second, it could be Wave 3 of a five wave decline. The decline immediately preceding a bounce seems logical for retracements and Wave 4 retraces a portion of Wave 3. Using this logic, the 62% retracement resides around 110-111. SPY has exceeded this retracement with the recent move above 114. Given the strength of this uptrend, there is also a good chance for an overshoot. It is kind of like a rubber band. The further it is stretched, the stronger the snap back. The decline from September to March was severe and SPY probably overshot on the downside. Even with the advance back above 114, SPY is still below pre-Lehman levels. SPY closed at 121.53 on September 12, 2008, which was the Friday before the Lehman bankruptcy was announced.

Chart 1

The alternative would be to base the Fibonacci retracement on the whole decline, which was from 149.53 to 65.58. Under this scenario, chart 2 shows the 62% retracement extending to 117.38. This level also jibes with potential resistance from broken support. Based on the two retracement scenarios and broken supports, one could argue for a resistance zone from 111 to 117. So will the real retracement please stand up? Technical analysis is a mixture of art and science. We have specific tools to use, but how we use them is subjective. At this point, I also think that resistance levels are potential. As noted on Wednesday, the uptrend from March to January dominates the current picture. We can dispute resistance levels, but there is no disputing this uptrend.

Chart 2

SPY ADVANCES WITHIN CHANNEL... Chart 3 shows SPY within a clear rising price channel. The ETF established support around 107-108 in late November and early December. Should the present trajectory continue, SPY would move to the upper channel trendline, which extends to 117-118 by the end of January. A downtrend cannot start until there is a lower low or support break at 107.

Chart 3

VOLUME FAILS TO IMPRESS, BUT PRICE DOES... Except for a few days, total volume since early November has not been impressive. Low volume can be expected during the holidays so analysis should focus outside Thanksgiving and Christmas. Chart 4 shows the Nasdaq with volume and the 200-day SMA of volume. Even though the Nasdaq is up around 13% since early November, volume since early November has been mostly below the 200-day moving average. Price action is not concerned with volume as the Nasdaq broke resistance in mid December. The overall trend here is clearly up with key support around 2100-2125. The index does look short-term overbought after an ~8% advance since early December. This means we could see a pullback to broken resistance, which turns into support around 2200.

Chart 4

Chart 5 shows the same settings for the NY Composite. This chart is especially interesting because there were low volume advances in early September and early November. Each advance was followed by a sharp pullback, but the index moved right back to resistance in mid November. Except for a few spikes, volume has been pretty subdued since early November. Dont forget to exclude the holiday periods. Even though volume is not impressive, price action is. The index formed a cup-with-handle and broke handle resistance this year. Key support is marked at 7000 and the trend is up as long as this level holds.

Chart 5

AD VOLUME LINES HIT NEW HIGHS... Even though overall volume levels can be important, Net Advancing Volume is perhaps more important for measuring buying pressure or selling pressure. Net Advancing Volume equals volume of advancing stocks less volume of declining stocks. Because large-caps tend to be the volume leaders, this breadth statistic can be considered a large-cap barometer. The simple AD Volume Line will tell us if advancing volume is outpacing declining volume or visa versa. The AD Volume Line rises when advancing volume is greater than declining volume and falls when declining volume outpaces advancing volume. Chart 6 shows the Nasdaq AD Volume Line breaking its Sep-Oct highs and recording a new 52-week high recently. Chart 7 shows the NYSE AD Volume Line moving to a new 52-week high in January. With new 52-week highs in both AD Volume Lines, it is clear that buying pressure remains stronger than selling pressure.

Chart 6

Chart 7

NEW HIGHS EXPAND IN DECEMBER-JANUARY... With the advance over the last 3-4 weeks, Net New Highs expanded to their highest levels since October. Net New Highs equals new 52-week highs less new 52-week lows. The bulls have a clear edge when Net New Highs are positive and rising. Conversely, the bears have an edge when Net New Highs are negative and falling. The bottom window in chart 8 shows Net New Highs for the Nasdaq moving above +200 in early January. This total fell to +115 on Thursday, but Net New Highs are clearly in positive territory and this is bullish. The main window shows Cumulative Net New Highs. Like the AD Volume Line, this line rises when Net New Highs are positive and falls when Net New Highs are negative. Except for a brief dip at the end of November, this line has been rising for months. Chart 9 shows NYSE Net New Highs expanding in December-January as well.

Chart 8

Chart 9