Change In The Air
February 01, 2010 – 9:30 am ET
There was a very definite change in the air last week. Not only were there declines but the declines were being lead by the most economically sensitive areas of the market on heavy volume.
ETF % Change Comparison
As you can see from the table above the hardest hit areas this week were the Semis (SMH) and the NASDAQ 100 (QQQQ), followed by Transportation (IYT) and the Small Caps (IWM). While the least affected were the Dow (DIA) and S&P 500 (SPY).
In a healthy market we want to see just the opposite. Instead is appears as though the smart money is shying away from the more risky areas of the market. This elevates the likely hood of sharp declines and the return to a bearish trend.
OM3 Weekly Indicator
The OM3 indicator is showing a ‘Strong Sell’ for all of the ETFs we track and several of them for the 2nd week. In addition to this they have all had several weeks of ‘Bear Alert’ warnings.
How to read the OM3 indicator
The OM3 indicator as with most of our models primarily reads price action and volume. The strong/weak buy/sell signals are self-explanatory. ‘No Signal’ means that the component readings are in conflict and cancel each other out.
The alerts let you know if the cycle is speeding up or slowing down, so when you get at ‘Strong Buy, Bear Alert’ for instance it simply means that the criteria for a strong buy is still in place but this weeks reading is weaker (or more bearish) than last weeks reading (the same is true in reverse).
The number of weeks that a signal has been repeated is displayed. Historically a ‘Strong Buy’ signal has lasted for an average of 6 weeks and a maximum of 42 weeks, while a ‘Strong Sell’ has lasted for an average of 4 weeks and a maximum of 16.
This is an indicator not a mechanical trading model. It is useful to assist in analyzing the market but for the best results should be combined with commonsense and support/resistance levels etc.
TransDow & NasDow
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TransDow Dominant Index |
NasDow Dominant Index |
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DOW |
DOW |
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NEW Signal |
12 Weeks |
As of Friday the Dow claimed dominance over the DJ Transportation Index while for the 12th week the Dow remains dominant over the NASDAQ. This further indicates weakness in the market.
The TransDow measures dominance between the DJ Transportation index and the Dow while the NasDow measures dominance between the NASDAQ and the Dow. In a strong market the more economically sensitive Transportation Index and NASDAQ will be dominant over the Dow.
A Look at the Charts
SPY is on the verge of breaking a bullish trend in volume that has existed since the start of the market recovery.
QQQQ is not looking healthy and OBV has moved into a bearish trend.
SMH is looking very bearish. Volume flows have been bearish for the last four months and have just broken below the November low. This would indicate that support around $24 is unlikely to hold. From there it is an easy fall to around $21 which would be a disaster for the broad market and cause widespread selling pressure.
IWM does not look much better than SMH and also has had weak volume behind the new high in January while OBV made a lower high.
While looking better than SMH and IWM the Transportation sector is far from bullish. The sideways trend in volume flows is in the verge of breaking.
Summary
There is little to say that is bullish about the current market. Advances over the last few months have been on week volume, recent declines have been on heavy volume and the most economically sensitive areas of the market have been leading the declines. The only thing positive is that the recent drop has brought the market near to oversold territory. This may entice bargain hunters looking to ride the next leg of the bull market.
Unfortunately it is unlikely that any bounce will go far and more likely that a new bearish trend has begun.
Any disputes, questions, queries… comments or theories are most welcome below.
Best Regards
Derry
And the Team @ ETF HQ
Quote Of The Day
"Every winner needs to master three essential components of trading; a sound individual psychology, a logical trading system and good money management. These essentials are like three legs of a stool – remove one and the stool will fall, together with the person who sits on it. Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems. Your trades must be based on clearly defined rules. You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game."
– Dr. Alexander Elder