Monday, August 05, 2013

Daily Market Commentary: Weakening Breadth as Indices Ride Channels

Markets have added a couple more notches since my last update, although sector breadth has weakened with the exception of Materials and Industrials. However, indices are running inside (or just above) their upper - but slower rising - channel bands.  The Nasdaq 100 is offering the most bullish picture and is the index to play for pullbacks; stops go on a break of the rising channel line (= "bull trap").


The Nasdaq has reached its measured move target and may start to consolidate from here. However, relative strength has swung sharply in its favour over Large Cap stocks (S&P), so longs can probably get a little more out of this.


Of the index breadth metrics, the Nasdaq Summation Index is probably the most reliable.  Here it's working a weak 'sell' signal (ADX and Stochastics are still too bullish to suggest this is a 'strong' signal).


The Russell 200 hasn't yet poked its head outside of the channel, and it has lost relative strength against the Nasdaq/Nasdaq 100 - but not the S&P. While it rides the upper channel line it's to be respected, but if it undercuts the 20-day MA there will probably be a short play to the lower channel line.


The S&P has managed to poke its head above the channel line, but not to the same extent as the Nasdaq 100. It has sharply underperformed against Small Caps since the start of May, and this is likely to change in the near future as money flows away from speculative issues to more defensive ones.


Momentum players are best to stick with buying weakness in the Nasdaq 100. Should the tide turn in favour of Large Caps (relative strength cross), then an aggressive short in the Russell 2000 on a break of the 20-day MA could offer a quick return.

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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com.
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