Weekly Market Digest: 2.19.2010

Welcome to our second Weekly Market Digest. We will be covering the action for the week ending Friday, February 19th.

First, a bit of house keeping to take care of.

I have setup a real-time chat room here on Portfolio Tilt. This format is more suitable for an active discussion, compared to the traditional comment system found on many sites including this one. It should facilitate a more constructive dialogue amongst the participants and help us all to become more successful traders.

I will be hosting some Q&A sessions in the near future, and we will do some structured discussions on topics such as sector plays (energy for example) or particular chart setups. Also, I encourage all of you to stop by during the general market hours to "hang out" and discuss the market action as it unfolds. I am confident that pooling together a community of intelligent and experienced traders/investors in this type of environment will be beneficial for everyone involved. If you have any suggestions for a specific topic you would like to see, feel free to post in the comments and we will get something setup.

Also, we would greatly appreciate it if you could take the time to write a brief review for us on our Alexa page. If you enjoy our content, and have been following us for a while, we encourage you to let others know what you think about the quality of the work we do here. Thanks!

Now, on to the charts. We will begin with an update on the 85 day (approx) time cycle we have been tracking here at Portfolio Tilt. Since our last update, the S&P has recovered quite nicely from its prior intermediate high, prices rose more than 3% for last week. However, we still remain about 40 points below the prior January peak on the S&P 500.

We continue to maintain a defensive stance because we cannot decisively make the claim that this corrective phase is over. Mid-late March is still around the time that we expect to see a major turning point, as it coincides with the next cycle bottom (blue) and gives this correction enough time to "mature" (8 week correction).

 

 

Last week, we discussed a number of specific events that would need to unfold in order for us to turn more bullish on the intermediate term prospect for equities. All of those events occurred during the recent rally. As you can see on the index charts below, all three major indices have reclaimed their 10 week EMA's.

Also, MACDH has reversed its downward trend, ticked to the upside from below the zero line, and has started to creep higher. This is bullish, and shows that although overall momentum is in favor of the bears right now, they are growing weaker as the bulls work to regain control.

On the ADX trend following indicator, the +DI line has crossed back above the -DI line, a signal that directional movement to the upside has returned.

RSI continues to hold above 50 on all three major indices as well. So in summary, we are trading firmly below 52-week highs, but prices are fighting back after four straight weeks of declines. Our indicators tell us that the bulls still maintain control of the long-term underlying trend right now, as they have been since the March bottom.

Remember that we are focusing on the long term outlook here. Once prices begin a long term trend, it is more likely for that trend to continue then to reverse. Prices continue to form higher highs and higher lows, and until this sequence is broken, the uptrend will continue.

 

 

 

Moving to the "Dow Theory" outlook. The third intermediate low highlighted on the chart remains unbroken. There are no major price divergences either, so overall the picture here remains healthy. Both indices appear to have confirmed another higher intermediate low as well.

 

 

I have commented over the last week on our Twitter page that the overall internals of the market actually look very healthy. This was surprising, given how sharply prices had declined over the last few weeks, and the magnitude of the sell off seen in a variety of leading stocks.

To illustrate this, I wanted to to highlight one chart from our Market Internals page, the weekly NYSE Advance-Decline issues line. Notice the divergence between NYSE prices and the Advance-Decline line. Although NYSE prices are below the prior intermediate high from January, the A-D line suggests that the underlying trend is healthy, as the line hits a new 52-week high. Many of the indicators on this page show a similar picture; although prices are weak, the underlying health of the market, the breadth of this rally, is quite strong.

 

 

From our International Markets page, a quick look at two of the leading stock market indices in some of the most rapidly growing markets.

The Brazilian Bovespa, and China's Shanghai Composite. Prices, on both indices, have pulled back to long term trendline support and held. This is especially interesting on the Shanghai Composite where prices have been virtually unchanged since August 2009. This has offered quite a bit of time for prices to consolidate towards a key trendline support that does not appear to be very steep, and thus should be more sustainable.

 

The Dollar confirmed the 10/40 week EMA cross buy signal we discussed last week. Over the last 5 years, this system has a very good record of getting in and out of major price trends, with a majority of the profits held. However, given last week's long-leg Doji print, there is clearly some uncertainty behind this trend, so it may be best to wait for a breakout from the recent 3-week consolidation.

 

 

The poll has been updated for the upcoming week so be sure to place your vote!

As always, the long term trend. You can also Follow us on Twitter or Facebook, and sign up for our Portfolio Tilt updates by e-mail , delivered every morning.