Tuesday, January 06, 2009

Breadth indicators getting toasty

It hasn't taken long for stocks to push above their much weakened 50-day MAs, but the 200-day MAs are still a long way from been challenged. The Nasdaq is overbought for the current cyclical bear market with respect to the Percentage of Stocks above their 50-day MAs and Percentage of Stocks on Point-n-Figure Buy Signals. But the Summation Index has upside room, and the 'dead mans' zone between the 50-day and 200-day MAs will provide wiggle room for stock gains without further overheating of breadth

What has been disappointing is the underlying strength marked by improving breadth hasn't translated to points gains for the Nasdaq. I think we will see a gradual decline in the Percentage of Stocks trading above their 50-day MAs as overbought levels are relieved - but this will be compensated by a growth in stocks trading above their 200-day MAs as new market leadership emerges.

The Bullish Percents will return to pre-2007 support/resistance boundaries and the 42.5% resistance level we are seeing now (which was former cyclical bull market support - not even former bear market resistance) will be broken to the upside.

All this will have the net effect of adding points to the Nasdaq score board, but once the Bullishp Percents get around the 60% level (and/or the Summation Index gets to zero) we will have an intermediate time frame top lasting a few months.

Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website