Tuesday, September 01, 2009

Stock Market Sentiment: Bearish Trends Unchanged

While the parent indices have traded relatively flat, the sentiment indicators have not deviated from their bearish trends. Using the Nasdaq Sentiment indicators as examples the bearish set up is clear to see - but as in 2006/07 it can take a year for the negative effects of sentiment to sweep through the markets; I doubt it will take that long this time around.

Strongest of the sentiment indicators has been the Bullish Percents; but even here the 70% threshold of point-n-figure 'buy' signals has been tough to crack - effectively asking the question: Who's left to buy? Note strong bearish divergences in the Ultimate Oscillator and MACD.


The Percentage of Nasdaq stocks above the 50-day MA have stumbled from a May peak of 83% down to a current 64%; fewer stocks supporting the rally also means more discrete selling in the market.


The smooth moving Nasdaq Summation Index has also drifted down since May, although it is the only sentiment indicator not to have all supporting technicals in the red. The Summation Index is the least volatile of the three sentiment indicators I follow, but even here its bearish stance is crystal clear.


So while the Nasdaq favours the bull position, the underlying health of the rally suggests one should be standing near the exits and be ready to leave.

A confirmed break (and backtest) of the Nasdaq 20-day MA (or stock 20-day MAs) would probably serve many well as such an exit point.


Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, stock charts, watchlist, multi-currency portfolio manager and strategy builder website. Forex data available too.

 
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