Market Timing

(Updated 07/03/2009)

The following daily charts show the major indices. The market was lower last week. Prices have finally traced out head and shoulders patterns but the necklines have not been broken. There could be an attempt to prevent a drop through the necklines next week but this will fail. The dashed white lines show the normal target from a head and shoulders top, which also corresponds to about a 50% retracement. The MACDs have negative divergences and are moving down with the Dow’s below zero. The next rally after this correction should take out the June highs but we are still in a secular bear market.

The following chart is the Russell 2000 vs. the NASDAQ volume. The second plot is the actual volume, the third is a 60-day moving average of the volume and the fourth the stochastic of the moving average of the volume. Volume increases in the direction of the primary trend, which had been down since mid 2007. The stochastic of the Volume has fallen during a correction for the first time in two years making it appear that the primary trend is changing to up. The most likely scenario is that prices will continue to fall on low volume. The next rally should be on higher volume.

The following chart is the S&P vs. the 10-day SMA of the new highs divided by the new highs plus the new lows. The blue line is the neutral 50% level. The indicator found resistance at the January 2003 high. It is not apparent due to the scale but the indicator turned down on Friday. If the 2002 bottom pattern is repeated the correction should form a large inverted head and shoulders pattern that will be followed by another rally into the latter part of the year.

The following chart is the S&P vs. the VIX. The VIX is still below the white trend line that started in early March. This trend line should be broken as the correction continues and the VIX should move up to the horizontal Red line. This level should provide resistance and then the rally should resume. A break of the Blue line would indicate the rally is dead. The VIX will have to fall below the Green line or the 16 level for the rally to be anything other than a bear market correction.

The following chart is the NYSE composite vs. the Advance Decline line. The A-D line looks stronger than the Price. There are no negative divergences so the correction should be followed by another rally into the third quarter.

The following chart shows the percent of Russell 2000 stocks with 20-day simple moving averages above 200-day moving averages since September 1988. After the four-year cycle bottoms in late 1990,1994, & 2002 the indicator quickly broke the Red line and a bullish four-year cycle developed. The indicator failed to reach the Red line after the 1998 bottom although prices moved to new highs. This four-year cycle proved to be bearish with severe declines in 2001-2002. The indicator is now near the top set in early 1999 and has started to roll over. Prices will probably rally again taking out the June highs but the indicator will fail to reach the Red line. The top that occurs later this year will be followed by a sell off that will break the March lows and bottom in 2010.

The next chart is a daily and monthly plot of the 30-year bond yield for two years and from 1988 respectively. Stock and bond prices have been decoupled (prices and yields are coupled) since late 2000. Yields are at support/resistance on the daily charts. The daily indicators are moving down suggesting an additional correction. The monthly chart indicators are moving higher while yields found resistance the top of the 20-year channel suggesting yields will eventually break above the channel. Stocks and yields are expected to move lower then have a last rally taking out the June highs. At some point stocks and yields will decouple and yields should head higher while stocks move to new lows.