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September 08. 2013

Market Review

Last week all three major U.S. indexes finished the week with gains. The Dow Jones Industrial Average gained of 0.8 percent for the holiday-shortened week to close at 14,922.50. The blue-chip benchmark snapped a four-week losing streak. The S&P 500 rallied 1.4 percent to finish at 1,655.17. The Nasdaq jumped 2.0 percent to end at 3,133.38. Among the key S&P sectors, health care the best weekly performer, while utilities dragged. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 16.

Short-Term Technical Condition

Right in line with our recent call, the market strongly bounced for the week, whereas the S&P 500 has exactly reached our price target of 1,655. Anyhow, if we have a closer look at our short-term oriented trend indicators, we can see that the bounce from last week has pushed the S&P 500 into the neutral territory of the Trend Trader Index and, therefore, the market is just trading 10 points below the bullish threshold of this reliable short-term oriented trend indicator. Nevertheless, both envelope lines of the Trend Trader Index are still decreasing, which indicates that the current bearish trend of the market has not been broken yet. This can be also seen if we focus on the Advance-/Decline 20 Days Momentum Indicator and the Modified MACD which still remain bearish from a pure signal point of view. Nevertheless, we can see a lot of bullish divergences in their readings, since the Modified MACD is about to flash a bullish crossover signal, whereas the Advance-/Decline 20 Days Momentum Indicator has shown some significant strengths recently.

More importantly, last week?s bounce has led to some encouraging crossover-signals within our short-term oriented breadth indicators, which can be seen as a quite positive sign that a bearish trend-break might be ahead. Short-term up-volume is trading well above short-term down-volume and in addition, there had been a bullish crossover signal within our Modified McClellan Oscillator Daily, which indicates that the broad market is regaining momentum. The same is true if we have a closer look at the High-/Low Index Daily. This reliable short-term tape indicator has also flashed a bullish crossover signal last week, as the number of stockss which are hitting a fresh 52 week?s low have dropped significantly (almost to zero percent), whereas the amount of new highs have started to show some strengths recently, indicating some green shoots of recovery. Only the percentage of stockss which are trading above their short-term oriented moving averages (20/50) are still bearish from a pure signal point of view, although they are just trading slightly below their bullish threshold.

Market sentiment is kind of quite neutral at the moment and the same is true if we focus on the option market. Smart Money has slightly started to get back into the market whereas the WSC Capitulation Index has dropped significantly, although it has not fallen by half of its rise yet. If we consider all those facts mentioned above, we think that the market could be in the process of bottoming out (at least for the short-term) and, therefore, the recent bounce could turn out to be stronger than previously expected. Despite the fact that our short-term trend indicators still remain bearish, we would advise our members not to short the market again, after the S&P 500 has reached our initial price target of 1,655 on Friday, since there are too many bullish divergences around. Furthermore, we think to see a stronger rally towards 1,685/1,695, if we see further improvements/bullish crossover signals within our short-term breadth-/trend indicators or a significant drop within our WSC Capitulation Index.

Mid-Term Technical Condition

The mid-term oriented up-trend of the market has slightly started to intensify last week, since the readings from our WSC Sector Momentum Indicator has continued to strengthen for the week, indicating that most sectors within the S&P 500 remain in an outright strong mid-term oriented up-trend. As already mentioned in our previous market comments’, as long as the gauge of the Global Future Trend Index is trading below 60 percent, the up-side potential of the market should be limited in price and time. Therefore, it was kind of encouraging that the gauge of this reliable indicator has shown some signs of bullish divergences as it has grown from 28 to 51 percent (9 percent below its bullish threshold), although the readings from the indicator itself still remain bearish from a pure signal point of view.

Mid-term oriented market breadth looks quite ok at the moment, since we have seen some small improvements in our mid-term oriented tape indicators. Especially, the percentage of stocks which are trading above their mid-term oriented simple moving average (100/150) as well as the Upside-/Downside Volume Index Weekly still remain bullish and their readings have continued to show some strengths recently. In addition, we can see that the Advance-/Decline Index Weekly remain quite neutral, as the amount of mid-term oriented advancing issues are more or less the same than the declining ones. Only the Modified McClellan Oscillator Weekly has showed a widening bearish gap last week, indicating that the momentum of advancing stocks is still lagging behind. All in all, we think that the mid-term oriented technical picture has improved fairly compared to last week, since the trend- as well as the breadth-structure of the market has given some encouraging signals. Nevertheless, before we think it is time for conservative members to get back into the market again, we would like to see a strong short-term uptrend, together with solid readings from the Global Future Trend Index above 60 percent, as well as increasing up-volume and advancing issues, to avoid the risk of a fast paced correction.

Long-Term Technical Condition

As per last week?s report, the long-term uptrend of the market remains intact, as most of our long-term trend indicators are bullish at the moment (Global Futures Long Term Trend Index and the WSC Global Relative Strengths). The Global Futures Long Term Trend Index is still indicating a technical bull market whereas the relative strength score of U.S. equities is trading well above its bearish zero percent threshold. Another interesting fact is that commodities are regaining strong momentum and, therefore, the bear market is this asset class might be over soon. Furthermore we can see that the global bull market has slightly regained some strength, as the gauge from the WSC Global Momentum Indicator has gained more than 14 percent since its recent low, indicating that nearly 50 percent out of 36 global stock market ETFs (all denominated in USD) are per definition in a long-term oriented uptrend. Long-term oriented market breadth has shown some bullish ground last week, as the readings from the High-/Low Index Weekly have improved for the week. Furthermore we can see that percentage of stocks which are trading above their long-term oriented moving average (200) have risen 68 percent, indicating that the tape remains quite strong at the moment. Only the Modified McClellan Volume Oscillator Weekly has continued to decrease for the week, indicating that the overall upside-volume momentum is still lagging behind.

Bottom Line

The bottom line: despite the fact that the short-term trend of the market remains negative, we think that there is a good chance that the market is bottoming out. For that reason, we would advise our aggressive traders not to short the market again, after the S&P 500 has reached our price target of 1,655. We would only focus on the short-side again, if there would be some bearish crossover signal within our short-term oriented tape indicators, in combination with a significant drop by the S&P 500 below 1,635. On the other hand side, we think that a rally towards 1,685/1,695 might be possible, if we see a bearish trend break within our short-term oriented trend indicators, in combination with continued strengths in short-term market breadth. Furthermore, we can see that the technical picture for the mid-term is improving and, therefore, conservative members should get ready to get back into the market soon, if we receive further confirmation within our indicator frame-work. Stay tuned!