General Market Trends: Mixed Signals or Simply Bullish?

Last week, I had predicted a pullback during this week’s trading. Well, it happened – sort of. Monday brought a general market tumble across all four major market indexes tracked in my General Market Trend indicator (GMT). Then, the markets spent the rest of the week battling back. Three of the four markets I track did experience a lower close on Friday than last week, constituting a week of price pullback; however, the NASDAQ battled forward on Friday to close at a higher mark than last week.

I had suggested that a six-week rally (higher week-over-week Friday close) was not normal. More typical is a run of three-to-four weeks, followed by a week or two of price pull back, then a resumption of trend. I had suggested that a seven-week, unbroken run up would be even more rare.

Three of the four major markets tracked for this column did as expected: they closed lower this week, breaking their six-week run up. The NASDAQ didn’t want any part of that routine, it closed higher for the seventh straight week! Wow! Go Team!

Two changes this week: 1) the DOW-30 Micro daily trend turned red (bearish) on the DOW’s pull back, and 2) the NASDAQ-100 managed to change flags, from red to green (bullish), on the weekly Short-term trend.

For the moment, the other major market daily charts within the GMT remain green through the Mid-term trend. The daily Long-term trend still unconvinced by this rally.

On the weekly charts, the Micro-trend remains intact for all four major markets. With the exception of the changing color of the NASDAQ Short-term trend, all the longer weekly trends remain red.

What an impressive recovery for this market from Monday’s sell off. Like the other markets, the NASDAQ-100 tumbled on Monday and spent the rest of the week battling back. Unlike the other markets, the NAS performed better intra-week to position itself for the higher high-water mark on Friday’s strength.

In the below NASDAQ-100 daily chart, I have drawn two boxes, the lower cyan box and an upper red box. The cyan box represents the battle already won by the NASDAQ-100, as it worked its way through a former resistance band. The red box is the battle just engaged.

Friday’s higher close for the NASADAQ-100 is the first testing of the water in this upper resistance band. Whether or not next week’s action carries convincingly into this upper band, or results in a price pull back (as I would predict), the upper resistance band has been engaged. It will be interesting to watch market play over the coming weeks to see if the strength in the NASDAQ-100 can be sustained.

In the below DOW-30 daily chart, note how the last several weeks’ activity has begun to flatten out. Take a look at the horizontal red line I’ve drawn below Dec-08’s lows and Jan/Feb-09’s highs. Observe how the DOW-30 market activity has flattened out as it approaches that red line.

The red line denotes support for the Dec-08 price action. In January, prices pulled back from a failed rally to drop beneath that red line. Now that red line acts as resistance to upward price moves. That resistance affect seems to be holding over the last several trading weeks in Apr-09. Prices seem timid as they approach that level.

Price support and resistance is a factor of market memory. Masses of traders "remember" these levels and, as such, they can become useful gauges of market strength. If the DOW-30 were to rise, convincingly, through the overhead resistance, odds are improved for a continued upward move. If prices attempt and fail to move through that resistance band, that could suggest a resumption of a downtrend.

There is a third possibility: continued lateral consolidation. If the DOW stabilizes at a level just beneath resistance, that will strengthen a future bid to take out resistance. So, consolidation – in my mind – could be a good thing over the next several weeks.

As a testament to the shift toward lateral consolidation, take a look at the cyan up-trend line drawn beneath the Feb/Mar-09 price lows. Note how the last two weeks’ price action has violated this trend line. Again, suggesting hesitation to test the overhead resistance.

There’s an old adage: over time, the stock market will seek to prove the most people wrong. At this time, there are a lot of people calling a market bottom. Others are preaching "Beware the Bear!" This is truly a difficult time to be an investor.

I prefer trading the market during these uncertain times, rather than investing in long-term buy-and-hold positions. During these times, I sleep better knowing I can convert to cash as I see the market ebbing away from me.

Some people prefer to stay in cash until the market stabilizes. That is a valid strategy, too. My point is simply this: what ever your approach to the market, make sure you understand what you are doing and why. Make sure you have clearly stated your targets and objectives. Too many new traders employ a hapless approach of Ready, Fire!

If you’re in the market, make sure you are taking the time to aim after you have prepared your strategy and before you pull the trigger.

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