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The McClellan Oscillator continues to be a crude but handy tool in alerting us of short term exhaustion points of selling. Friday was no different. Despite a big miss by IBM the Dow Jones Industrial Average finished in the green (barely) and continued its streak of not having a single 3 day losing streak in 2013. Considering that company is by far the largest weight in the 30 company index, that is a minor miracle – the Dow finished up 0.07%. The S&P 500 0.88% and the NASDAQ 1.25% to cut losses in what was otherwise the weakest week of the year. For the week the S&P 500 was down 2.1% and the NASDAQ 2.7%. Without major economic news most of the gain was due to stock specific gains such as those in Google (GOOG), Microsoft (MSFT) and the large cap biotech companies which rebounded sharply after their one day of major losses Thursday.
Turning to the S&P 500 chart we saw a decent bounce off the 50 day moving average. As said yesterday this remains a time to be cautious as a major trend has been broken but nothing goes straight up or down, so bounces are to be expected and with two major down days in the week a light volume bounce can happen at anytime; that is what happened today. It can continue, as there is no change to the pattern developing until a new high is created and/or the major trend of the past 5 months is recaptured. What we will start looking for go forward is a bearish “head and shoulders” pattern - this is where the market rallies (left shoulder), rests, rallies to a new high (head), pulls back, and then on the third thrust forward fails to make a new high (right shoulder). The potential shoulders are shaded in yellow below. A move back over 1580s and preferably a new high will negate this potential pattern but until then rallies should be viewed with some suspicion.
The NASDAQ is obviously more broken – and Apple (AAPL) reports early next week which will be a big impact on this index. In can now rally 100 points and still be in a vulnerable position technically as that would take it to 3300ish.
Here is the NYSE McClellan Oscillator – you can see we worked off a good portion of the relatively extreme oversold condition today. Reading between 40 and 50+ have generally led to bounces in 2013; yesterday we saw -40.
Strength was in the same old groups – utilities, consumer staples, and biotechs which specifically roared back after yesterday’s sharp selling.
Google (GOOG) had a nice day on big volume, the key is to hold the escape from this multi week downward channel. It finished right at the 50 day moving average. If it simply rolls back over in the next week or two this will be a nasty trap.
On the downside we continue to see poor action in the commodities groups – copper, oil, gold, silver – you name it, there are continued bear flags that break down to the downside over and over. At any point these can “dead cat” bounce but one look at how these behave versus the charts of utilities, biotechs et al shows you why its better to stick to strength all things being equal.
Next week will be interesting as we shall see if this is yet another quick and dirty shakeout for the market – albeit the most severe of the year – or the technical pattern will continue to morph into something more sinister.