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Tuesday, October 30, 2007


market analysis

s&p 500

this illustrates the divergence at the recent new highs in the s&p -- net points gained, net advancers, net volume all refused to confirm the new high.

nyse tick has been refusing to confirm the progressive new highs for many months. the mcclellan oscillator has been in a series of nonconfirming declining peaks since mid-september.

percentage of issues trading over 10-day and 30-day moving averages is a shorter-term indicator, but the 30-day measure does certainly indicate narrowing participation since early october. but the narrowing of the market becomes much more obvious taking a longer term picture, using the 150-day moving average.

virtually every divergence of this kind portends further price falls. particularly amazing is the strength and duration of this divergence -- the index was making all-time highs with just 62% of its components trading over their 150dma. the most recent previous instance of that being the case, as far as i can tell: the 1994 slowdown.

using quarterly new highs and new lows, we can see a continuing divergence in issues within 5% of new highs as the index has tested new highs. as can be seen, this has been ominous for the market in the past.

using 20-day new highs and lows, we can also see a more recent breadth failure of a short-term nature. but here the question might arise, as with the participation of issues trading over their 10dma -- could enough of a washout have taken place on october 22 to have put a temporary rally in place? one which tomorrow's anticipated rate cut could capitalize on, sending the market to new highs?

it's certainly possible -- the market will do what it wants. but it would seem to me that larger divergences are now in place as a result of the rally from mid-august to early october that could well define the beginning of a more significant downdraft, and probably limit the upside of any rate cut rally without first arranging some positive basing.

nasdaq 100

the most powerful remaining individual issues in this bull -- goog, rimm, aapl, bidu -- are loaded into the nasdaq 100, which has been setting new highs too. but weakness is, though less pronounced, also clearly developing here.

there's little intimidating here, but there is some faltering in the last couple of weeks.

more pronounced breadth divergences show going back through all of october in the mcclellan oscillator and participation over 10dma and 30dma -- but here again i think the participation over 150dma really spells out the seriousness of the breadth falloff in the market:

this looks more serious than the others.

the picture in terms of quarterly new highs is also pretty fearsome.

and the 20-day new highs show much less indication of a recent short-term low.

all in all, there seems considerable reason to expect a fairly serious fall in these indexes in the short- to intermediate-term. of course, that needn't be manifested immediately -- but it certainly does seem that risk outweighs reward at this juncture.

iyf financials

i unfortunately lacked the courage of my convictions on september 11. what about now?

behavior here since october 9 has been awful, and iyf has resumed its place in the market basement (alongside real estate) over that time. new downside leadership in net advancers and net volume places this index squarely in continuing bear market territory. even the good news in net points is mitigated by the failure to improve on july levels at the same price.

there's no denying, though, that this sector has washed out very hard, and some positive divergences exist. it sounds funny to say in light of the fundamental issues facing the financials, but there might be better downside plays elsewhere.

some weakness showing in 65-day new highs as well, but not exaggerated.

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