Thursday, June 14, 2007

Technical Thursdays: Diverging Trends

As the equity markets work off their deep oversold conditions, it is most productive to measure the breadth of the upside move. The two charts to your left are useful in gauging the current power of the move. Both utilize the advance/decline line - one for the NYSE, the other for NASDAQ.

The NYSE chart (first one) is very short term (two months) and points to the confirmation process that the current rally would need to produce should the S&P 500 climb to a new all-time high. As the chart shows, the potential exists for a first time in this bull market non-confirmation of price and a/d. Too early to say for sure, but worth monitoring fairly closely. However, it is also worth noting that both momentum and MACD are signaling a continued weakness to the power of the move - a point first made in my May 23rd blog entry.

The NASDAQ chart (second one) is fairly long term (five years) and clearly shows a very serious divergence between the index and the a/d. Moreover, the recent bull run has been met not with confirming strength but further deterioration. This is the single most significant divergence to the overall bull market, but one that has yielded little beyond a curiosity as the index has marched to new recovery highs regardless of the breadth of that market.

Investment Strategy Implications

The ever present mountain of liquidity will clearly need to take some time to work off. However, the potential of a market topping process is in place, especially when you have substantial technical damage via the recent market drop.

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