Posted | by David Moenning |

If it's Tuesday, it's time to focus on the trend and momentum of the market. We start each week with a review of the primary market cycles through the lens of our big-picture primary cycle models. Next, I like to review the market's trend and momentum via our indicator boards and running through some charts.

Although I promise not to make music references to the stock market's action every week, the theme to this week's technical review can be summed up with the refrain from The Door's hit, "Break On Through (To The Other Side)" as the S&P 500 appears to be breaking out of the trading range that has been in place since early June.

Next, let's take a look at the state of our trend and momentum indicators.

The State of the Trend Indicators

The Trend board indicators are designed to determine the overall technical health of the current stock market trend in terms of the short- and intermediate-term time frames.

The trend board improved nicely over the past week as both the Short-Term Trend and Channel System indicators moved up into the green zone. The only stick in the mud here is the weekly view of the market's cycle composite, which points lower for the week. The good news is the cycle composite suggests stocks could move higher for the next several weeks before succumbing to the traditional pre-election jitters. But for now, the Price board suggests that the trend is our friend.

View Trend Indicator Board Online

My Take on the State of the Charts...

One of the most positive things a market can do is to break out of a range. Especially if there is some "oomph" behind the move (we'll look at that via the momentum boards in a moment). The bottom line is breakouts to the upside often lead to a new, sustained leg higher. As such, this week's action so far is encouraging.

But... (you knew that was coming, right?) The breakout must hold. Unfortunately, in this day and age of computerized trading, breakouts too often become "fake outs" as mean reversion trades tend to be placed at obvious price points on the chart. So, for the bulls to get excited, we will need to see the S&P 500 remain above the breakout level for several days - with a successful test or two of the breakout being preferred.

S&P 500 - Daily

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Turning to the NDX, I wrote last week that the market darlings were due to take a break. And while yesterday's outperformance of the megacap leaders was indeed impressive, I can argue that a trading range may be developing on the NDX. This would be a good way for a consolidation to unfold here as the leaders could "rest" while the broader market plays catch up. However, so far at least, the broad market isn't really catching fire. Something to watch going forward.

NASDAQ 100 - Daily

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The State of Market Momentum

Once we've reviewed the state of the charts, we then analyze the internals to determine if there is any "oomph" behind the current trend via our group of market momentum indicators/models.

Overall, the Momentum Board has improved over the past week as the Short-Term Trend and Breadth Confirm, Volume models upticked as did the Intermediate-Term Price and Volume Thrust models. This is a good thing as momentum appears to be confirming the movement in price. However, I am a bit concerned that the Short-Term Volume Relationship Model produced a fresh sell signal. This simply shouldn't be happening. As such, the board suggests that the bulls may not be in the clear and that a "breakout fake out" remains a possibility.

* Source: Ned Davis Research (NDR) as of the date of publication. Historical returns are hypothetical average annual performances calculated by NDR. Past performances do not guarantee future results or profitability - NOT INDIVIDUAL INVESTMENT ADVICE.
View Momentum Indicator Board Online

The Bottom Line

As the saying goes, the trend is your friend. To borrow another old Wall Street adage, the thinking is that a trend in motion tends to stay in motion. But in order for these clichés to work for investors here, I'm of the mind that we need to see the market "broaden out" a bit. While a "nifty fifty" type of market environment (a market where leadership is concentrated among a handful of leaders such as the current "FANMAG" situation) can last a long time, healthy market advances include both "the troops" and the "generals." Therefore, I'll be watching the action in the small- and mid-caps for signs of "broadening."

Thought For The Day:

"Failure? I have never encountered it, only temporary setbacks." -Bill Marriott

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research


At the time of publication, Mr. Moenning held long positions in the following securities mentioned: None - Note that positions may change at any time.

Trend Models Explained

Short-Term Trend Model:A series of indicator designed to identify the status of the stock market’s short-term (0-3 weeks) trend. The model compares the current price of S&P 500 relative to 5-day customized smoothing (weighted and moved forward 3 periods), the relationship of the 5-day to the 10-day, and the relationship of 10-day to 39-day.

Short- and Intermediate-Term Channel Breakout Systems: The short-term and intermediate-term Channel Breakout Systems are modified versions of the Donchian Channel indicator. According to Wikipedia, "The Donchian channel is an indicator used in market trading developed by Richard Donchian. It is formed by taking the highest high and the lowest low of the last n periods. The area between the high and the low is the channel for the period chosen."

Intermediate-Term Trend Model: A model designed to identify the status of the stock market’s intermediate-term (3 weeks to 6 months) price trend. The model compares the current weekly price of S&P 500 relative to relative to customized 10-week smoothing (weighted and moved forward 3 periods), the relationship of the 10-week to the 30-week, and the relationship of 30-week to 55-week.

Long-Term Trend Model: An indicator designed to identify the status of the stock market’s longer-term (>6 months) trend. The indicator compares the 50-day smoothing of the S&P 500 relative to its 200-day smoothing. When the 50-day is above 200-day, the indicator is positive and vice versa.

Cycle Composite Projections: The cycle composite combines the 1-year Seasonal, 4-year Presidential, and 10-year Decennial cycles. The indicator reading shown uses the cycle projection for the upcoming week.

Short- and Intermediate-Term Trading Mode Models: These indicator attempt to identify whether the current market action represents a "trending" or "mean reverting" environment. The indicator utilizes the readings of the Efficiency Ratio, the Average Correlation Coefficient, and Trend Strength models.

Momentum Models Explained

Short-Term Trend-and-Breadth Model: History shows the most reliable market moves tend to occur when the breadth indices are in tune with the major market averages. When the breadth measures diverge, investors should take note that a trend reversal may be at hand. This indicator incorporates an All-Cap Dollar Weighted Equity Series and A/D Line. At the time of this writing, when the A/D line has been above its 5-day smoothing and the All-Cap Equal Weighted Equity Series is above its 25-day smoothing, the equity index has gained at a rate of +26.5% per year since 1980. When one of the indicators is above its smoothing, the equity index has gained at a rate of +14.5% per year. And when both are below, the equity index has lost over -20% per year.

Intermediate-Term Breadth Model: A proprietary diffusion index developed by Ned Davis Research. The indicator is designed to determine the technical health of the market’s 157 sub-industry groups (GICS categorizes the market into 11 sectors, 20 industries, and 157 sub-industry groups). Technical health is determined by the direction of each sub-industry’s long-term smoothing and the rate of change of the sub-industry’s price index.

Short- and Long-Term Volume Relationship Models: These models review the relationship between "supply" and "demand" volume over the short- and intermediate-term time frames.

Intermediate-Term Price Thrust Model: This indicator measures the 3-day rate of change of the Value Line Composite relative to the standard deviation of the 30-day average.

Intermediate-Term Volume Thrust Model: This indicator uses NASDAQ volume data to indicate bullish and bearish conditions for the NASDAQ Composite Index. The indicator plots the ratio of the 10-day total of NASDAQ daily advancing volume to the 10-day total of daily declining volume. The indicator supports the case that a rising market supported by heavier volume in the advancing issues tends to be the most bullish condition, while a declining market with downside volume dominating confirms bearish conditions.

Breadth Thrust Model: This indicator uses the number of NASDAQ-listed stocks advancing and declining to indicate bullish or bearish breadth conditions for the NASDAQ Composite. The indicator plots the ratio of the 10-day total of the number of stocks rising on the NASDAQ each day to the 10-day total of the number of stocks declining each day. Using 10-day totals smooths the random daily fluctuations and gives indications on an intermediate-term basis. Historically, the NASDAQ Composite has performed much better when the 10-day A/D ratio is high (strong breadth) and worse when the indicator is in its lower mode (weak breadth). The most bullish conditions for the NASDAQ when the 10-day A/D indicator is not only high, but has recently posted an extreme high reading and thus indicated a thrust of upside momentum. Bearish conditions are confirmed when the indicator is low and has recently signaled a downside breadth thrust.

NOT INVESTMENT ADVICE. The opinions and forecasts expressed herein are those of Mr. David Moenning and Heritage Capital Research and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

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