Friday, February 8, 2008

Long Term Tests And Changes In Trend

The charts below of the major indexes show that after testing two standard deviations below their longer term linear regressions lines, some have broken down and rallied to test these previous support levels. The breaking of this lower 2-standard deviation like is a set to show a potential longer term change in trend. The bottom pane of the charts shows a Worden Brothers proprietary indicator called Money Stream. It basically takes into account price and volume to show accumulation vs. distribution. This indicator also shows some breaking of long term trend lines.

This first chart is of the S&P 500 Index. As the end of 2007 finished strong, the Money Stream indicator did not confirm the strength of prices trading over the 1500 area. As prices retreated to their linear regression line, selling intensified until there was a test of 2 standard deviations below this long term linear regression line. While the white line showing 1 standard deviation and the yellow line showing 1.5 standard deviations have proven to be support in the past, this 2 standard deviations below only proved to be a pausing ground for further selling. Now that prices have broked this level. It is important not to fall in love with any rallies. The rallies should be sold, as the longer term trend is now proving to be a headwind to trading from the long side.

S&P 500 Index (click charts to enlarge)

This next chart is of the S&P 100 Index - OEX. This index is still trying to hold this 2 standard deviations below level. The Money Stream indicator confirms the weakness in prices. This index is slightly stronger that the S&P 500 Index, and this could be due to these larger capitalized companies have greater exposure to global economies and not being overly weighted with domestic banking and financial stocks.

S&P 100 Index -OEX (click to enlarge)

The Nasdaq 100 Index -NDX is the index that is comprised of the top 100 technology related stocks. This chart shows that the -2 standard deviation level is holding as support for now. This could be the result of global demand for technology. China, India, and other growing economies are still in need of networking and technology infrastructure. This is not something that can be delayed because growth has slowed from 10% to 8%. Another factor that comes into play is as the United States economy slows, companies will seek ways to become more efficient, thus providing some some support for select companies. This does not mean this index is a total safe haven for over-all market weakness. For the time being it is still trading in the lower levels of its over-all longer term trend. Money Stream is showing a strong break, so being selective on individual stocks is key.

NDX - Nasdaq 100 Index (click to enlarge)

This last chart is of the Russell 2000 Index. This is a broader index and it shows similar patterns to the S&P 500. The longer term trend in the Money Flow index also shows a break in trend. This does not mean that selected stocks are not going to have great days, it just means that stock selection is key and the over-all market is facing stronger headwinds.

Russell 2000 Index(click to enlarge)

The next post will deal with scanning for stocks that diverge from the over-all trends in money flows and linear regression slopes from the larger indexes. These charts and indicators are from Telechart. Telechart offers a 30day free trial for their service. If you decide to take advantage of this offer from Telechart, email me at the button on the upper right for the setting I have used in developing these charts. The charts above are 3day bar charts. This means each bar consists of prices for three days. This has a smoothing effect on prices, eliminating one day wonders in the market. Telechart website can be viewed HERE.

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