TECHNICAL ODDS FAVOR HIGHER STOCK PRICES -- ON BALANCE VOLUME FOR NYSE INDEX HITS NEW HIGH FOR THE YEAR -- BOTH VERSIONS OF THE NYSE ADVANCE DECLINE LINE HIT NEW RECORDS
UPSIDE BREAKOUT IN NYSE COMPOSITE INDEX STILL LOOKS LIKELY... My May 25 market message suggested that the stock market still had more work to do on the upside. That was based primarily on Elliott Wave Analysis which suggested that the market was still in a Wave 4 correction/consolidation pattern which should be followed by another upleg to new highs (a Wave 5). Elliott Wave Analysis suggests that markets have five waves before being completed -- three up with two intervening corrections. My analysis suggests that we've only had four. In other words, one more to come. Feel free to go back and reread that earlier message if you want a more detailed EWA analysis. I'm going to approach the market today from a more traditional technical viewpoint. That earlier message showed the NYSE Composite Index in a potential bottoming formation. The weekly bars in Chart 1 show an updated version of the NYSE.
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Chart 1
TECHNICAL READINGS ARE POSITIVE ... My May 25 message referred to the flat line drawn over the highs of the fourth quarter and this spring as a "neckline" which is normally part of bullish "head and shoulders" bottoming formation (see Chart 1). To complete that bottom, however, prices have to close decisively above the neckline. That hasn't happened yet. Technical indicators, however, suggest that an eventual upside breakout is likely. First of all, the 14 week RSI line (top of chart) remains above its 50 line which reflects positive momentum. More importantly, weekly MACD lines (below chart) have risen above a falling trendline extending back to the middle of 2014. Both MACD lines are also above their zero lines. It was the bearish divergence in those two lines in mid-2015 that signaled problems ahead (red arrow). At the moment, the two weekly MACD lines are sending a more bullish message. So is the fact that the blue 10-week average is well above the red 40-week line. All of those indicators (combined with a bullish chart pattern) portray a positive image. There's more.
ON BALANCE VOLUME LOOKS POSITIVE... One of the hallmarks of a potential "head and shoulders" bottom is the volume pattern. In other words, volume should form a bottoming pattern of its own. And it appears to be doing that. The green line above Chart 2 is an On Balance Volume (OBV) line of the NYSE Index. The OBV line is a cumulative total of upside and downside volume. Volume is added on up days and substracted on down days. As a result, the trend of the OBV line tells whether there's more buying or selling. More importantly, it should trend in the same direction of the price action. In many cases, the OBV leads the price action higher. The green line in Chart 2 shows the OBV line forming a potential "head and shoulders" pattern of its own. More importantly, the OBV line has already risen above its "neckline" and is close to exceeding its October high. It looks to me like the OBV line has already bottomed. That increases the odds that prices will eventually trend in the same direction. I'll leave it up to you to decide that for yourself.
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Chart 2
NYSE ADVANCE-DECLINE LINE CONTINUES TO HIT NEW RECORDS... Market breadth is another important way of measuring the direction of the stock market. One of the most common ways of measuring that is the New York Stock Exchange Advance-Decline line. The NYAD line is a running cumulative total of advancing minus declining stocks on the big board. Its direction is very important. The green line in Chart 3 shows the NYAD line bottoming with stocks in February. It then hit a new record high during April and continues to set new highs on a daily basis. That's a bullish sign for the stock market. My May 25 message compared that version of market breadth to a second version of that line which includes only common stocks. Some analysts believe that purer version of the advance-decline line gives a truer message of market breakth. Let's take a look at it.
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Chart 3
NYSE COMMON STOCK ONLY AD LINE ALSO HITS NEW RECORD... The green line in Chart 4 plots the Common Stock Only version of the NYSE Advance-Decline line. The chart shows the green line rising much faster than the price index. In fact, the green line has just hit a new record high. To me, that's another vote of the confidence in the market's major trend. And, in my opinion, increases technical odds for another upleg in the market. It also increases the odds for the NYSE Composite Index to eventually break out of its "head and shoulders" bottom.
