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Thursday, June 05, 2008


more on a possible top

yesterday i pointed out some market screens that might be indicating that the rise from the january 22/23 catharsis which i was so optimistic about and unfortunately early to is playing out, at least for the intermediate term. as can be noted from that january 10 post, given the subsequent mid-march successful retest, that there are grounds for expecting a longer rally -- and perhaps an agonizing, prolonged top -- or no "top" at all, but merely a breather on the way to new highs later in the year. whatever the case turns out to be, developing weakness merits attention.

the strength of the rally since march (or january, really) has been in transports, basic materials and energy. what can we say by examining those sectors in turn?

the DJTA ETF proxy IYT is retesting all-time highs from july 2007 -- but internally it has become a correction waiting to happen. demand (as measured by issues penetrating volatility envelope upper bounds) has been fading since early may; the same can be said of issues making new 65-day highs. the mcclellan oscillator of the basket has been putting in declining peaks for the same span, and each higher price peak is met with a lower percentage of issues trading over its 10dma.

such divergences can persist for well more than a month -- perhaps there are new highs still out there? but the balance seems to me to be pointing toward greater downside risk. also interestingly in the longer term snapshot: net advancers and net volume are clearly not confirming the test from july 2007, some 11 months back.

the energy sector IYE is weakening -- behavior of volatility envelopes are weakening, 20-day new highs and lows are deteriorated, mcclellan oscillator and summation are not confirming -- but hasn't the extent of the transports' negative features.

the materials sector IYM is behaving similarly -- new highs declining, new lows expanding, volatility envelopes fading -- each signal of the eroding participation that often precedes price weakness. as with IYE, net volume and issues as well as points are confirming recent new highs -- but they are lagging somewhat nonetheless. correction here might look mild agaisnt the longer-term trend.


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