Issue Date: 2003 Dec 07 

Chip Anderson: Scanning for Important Index Developments
John Murphy: NASDAQ Up Against Formidable Resistance
StockCharts Web Site News: Our Holiday Membership SPECIAL is Back!
Richard Rhodes: The Best New Position Trade
Carl Swenlin: Nine-Month Cycle Analysis
Arthur Hill: Weak Relative Strength May Foreshadow an Important Trend Change

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TECHNICAL ANALYSIS OF THE FINANCIAL MARKETS
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Hello Fellow ChartWatchers!

It's a critical time for the 2003 bull market. The Nasdaq touched 2000 last week and quickly retreated. Is it now consolidating before staging another assault? Or has it finally run out of steam? On Friday, the index closed near its lows at 1931. If it falls below it's previous low of 1878, then the long rally will be in jeopardy. On the other hand, a reversal and a decisive move above 2000 spells good time ahead. I know that all ChartWatchers will be watching things very closely next week.

John Murphy and Arthur Hill have some thoughts on how the Nasdaq's battle will play out, Carl Swenlin looks at cycle analysis, and Richard Rhodes thinks that the Nikkei looks good for 2004. But first...

Scanning for Important Index Developments

It's always a good idea to know if any of the major indices have important patterns or signals on their charts. Signals for the major indices can help determine your overall approach to the markets. It's hard to be bullish if there's a big reversal pattern sitting right there on the Dow chart for everyone to see.

One way to make sure that you haven't missed any important signals is to use our Advanced Scan Interface to create a scan that searches all of the indices in our database for things such as bullish or bearish candlestick patterns. In addition to alerting you to patterns on individual indices, these scan can also alert you to strong or weak sectors and industries as we'll see.

Here are two examples of scans that I use to watch for Candlestick patterns in our indices:

Bullish Indices - Candlesticks:

[type = stock] and [[Hammer is true] or [Bullish Engulfing is true] or [Bullish Harami is true] or [Piercing Line is true] or [Morning Star is true] or [Rising Three Methods is true] or [Three White Soldier is true]]

Bearish Indices - Candlesticks:

[type = index] and [[Shooting Star is true] or [Bearish Engulfing is true] or [Bearish Harami is true] or [Dark Cloud Cover is true] or [Evening Star is true] or [Falling Three Methods is true] or [Three Black Crows is true]]

(Extra members can run these scans by copying and pasting those criteria lines into the Advanced Scan Interface and then saving the scans for later use.)

First off, notice that we are looking for "type = index" rather than the usual "type = stock". That means that the scan will only look at the 800+ indices that we have in our database.

Second, notice that the candlestick pattern expressions are connected with "or's" rather than the more common "and's". That way, we'll find indices that have any of the candlestick patterns.

Finally, notice that all of the "or" clauses are surrounded by an additional set of brackets. Any time you mix "and's" and "or's", you need to surround the "or's" with additional brackets otherwise you won't get the results you expect.

Right now, when I run those two scans, I get zero results for the "Bullish Indices" and I get five results for the "Bearish Indices". Here's the "CandleGlance View" of the Bearish Results:

Experienced candlestick users could quickly see that DJ US Comm Tech Index ($DJUSCT) and the SP/TSX Energy Index ($SPTSEEN) charts both have Bearish Harami patterns, the DJ US Internet Index ($DJUSNS) has a Shooting Star pattern, the DJ AIG Commodity Index ($DJAIG) has a Bearish Engulfing pattern and the DJ US Entertainment Index ($DJUSET) has a dramatic Three Black Crows pattern right now.

The same technique can be combined with our P&F Chart Pattern signals to provide additional insight.

- Chip Anderson

NASDAQ UP Against Formidable Resistance

In my opinion, the key stock average to be watching right now is the Nasdaq Composite Index. That's because of its importance as a leading indicator for the rest of the stock market. The weekly chart shows a major resistance barrier in the Nasdaq at 2098, which was the high reached at the start of 2002. That has been a major upside target for the Nasdaq market -- and also represents a level where some profit-taking can be expected. A lot of traders are chart watchers. They know that a good time to take some money off the table is when an overbought market reaches a major price peak. Apparently, some traders jumped the gun this week and started selling at 2000, which is more of a psychological barrier. Traders also like to take profits an important round numbers. Although there's no particular chart significance to 2000, it's only .05% away from a major resistance level. Why wait? The weekly indicators are also weakening. The 14-week RSI line has been slipping back below 70 which shows some loss of upward momentum. More importantly, the weekly MACD lines turned negative this week for the first time in a year. That's another sign that the Nasdaq rally may be running out of steam. The first support level to watch is the 10-week moving average and this week's price low. Any closing violation of those levels would be more cause for concern. The fact that this week's downside reversal occurred on the heaviest volume in four weeks is a negative sign.

 

- John Murphy

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The Best New Position Trade

Quite simply, as we peer out into the future for 2004 and beyond - we are continually challenged by what is going to be the "best new position trade" that will be relatively more profitable, and one that does not have a substantial participation rate at present. And, we have come to the conclusion that in macro terms - the Japanese Nikkei 225 is going to outperform the S&P 500...perhaps by a substantial amount. Therefore, we would become buyers of Japanese equities at the expense of holding US equities.

If we look to a chart of the Nikkei 225 vs. S&P 500 Ratio, we think it very simplistic in its nature, and that which is simplistic tends to be most profitable. In essence, a "bullish declining wedge" bottom continues to develop, but the ramifications are quite positive once the upper boundary trendline is violated as it would further have violated the 170-week moving average. And, if we peer further - we would put our target on the initial portion of the trade to 15...which was the high in 2000. Having said this - one could draw the conclusion that Japan is going to "outperform" by a very large 50% (however it looks very modest in the chart). Our choices are two fold: Japanese ETF's and specific Japanese company ADR's.

- Richard Rhodes

Want more of Richard's award-winning advice? Check out his Web site: TheRhodesReport.com


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Nine-Month Cycle Analysis

No one knows exactly what cycles are, but I think of them as a natural ebb and flow of psychological energy that often have a visible influence on market prices. The 9-Month Cycle (aka 40-Week Cycle) is widely recognized among those of us who follow cycles, and it provides an important context for intermediate-term decision making.

Let me say from the outset that cycle interpretation is more art than science, and this article is by no means the last word on the subject. In fact, you may draw different conclusions when you look at this chart.

Cycles are measured from trough to trough, and I have placed the dashed vertical lines at the points where cycle troughs are located, assuming an equal 'nominal' cycle length. As you can see, price lows are often found at or near those points. Other times prices behave in a completely irrational manner relative to the theoretical cycle structure. This is because there are other things that can have much more influence on prices and cause them to move contrary to what the cycle schedule would have us anticipate.

The price tops associated with the cycle crests will normally occur late in the cycle during bull markets, and the price lows at the trough are higher than at the previous trough (see cycles 1 through 4 above). In bear markets price tops arrive early and price lows are progressively lower (see cycles 8 and 9 above).

Occasionally there are 'inversions' (see cycles 5 and 6). This is where prices behave the opposite of what the cycle structure implies should actually happen. For example, cycle 5 behaved normally for most of its duration but failed to crest, making a new price high near where there should have been a price low. The prices in cycle 6 were completely inverted.

What prompted me to write this article is that cycle 11, the current 9-Month Cycle, which has behaved normally up until a few months ago, is behaving as if it may invert. There is still time for a price decline into the nominally projected trough around the end of December, but prices have been unusually strong, and we should prepare for a possible price inversion, which means that we'll be seeing a series of new highs into the cycle trough instead of a price correction.

If we get an inversion, the two examples above imply that prices relative to the cycle ideal will be so screwed up that cycle analysis will cease to be a useful tool for some period of time. More important, if we see price highs instead of a correction into the cycle trough, a price correction is likely to commence immediately thereafter.

- Carl Swenlin

Visit Carl's website -- DecisionPoint.com -- for the most compehensive collection of market indicator charts on the Web. Breadth charts, Investor sentiment charts, P/E charts, even historical charts going back to the 1920s - DecisionPoint has it all!

Weak Relative Strength May Foreshadow Important Trend Change

The top chart shows the Nasdaq Composite ($COMPQ) relative to the S&P 500 ($SPX), S&P Midcap 400 Index ($MID) and S&P SmallCap 600 Index ($SML). The Nasdaq Composite outperformed MID and SML from Oct-02 to Sep-03, pretty much a full year. The Nasdaq Composite outperformed the S&P 500 from Oct-02 to Nov-03.

More recently, $COMPQ has started underperforming these three indices. Relative to the $MID and $SML, $COMPQ has underperformed since mid September (black line/arrow). In addition, $COMPQ started underperforming $SPX from the beginning of November (green arrow/line).

$COMPQ did manage to better its November high by 8 points in December, but this wasn’t good enough. The price relative ($COMPQ relative to $SPX or the red line) peaked in November and has a lower high working in December for another bearish divergence. The leader has stopped leading the way higher and this suggest a rotation or trend change is afoot.

- Arthur Hill

For more of Arthur's insights, check out his Web site: TDTrader.com


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