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Best of 2005: Point & Go Figure: Is the Context Changing?

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Editor's Note: This article was published on 11/11/2005

It has been more than a six weeks since the long-term contextual indicators I follow, the bullish percent indexes for the NYSE and Nasdaq, moved to negative.

Since Sep. 22, the S&P 500 has risen by 1.35%, the Dow Jones Industrial Average has risen 2.09%, and the Nasdaq Composite has climbed 4.07%. So, is the context of high risk changing? How can these broad market measures be up while the overall context is negative? Where are we?

Here is a chart of the NYSE Bullish Percent.

The chart above, which calculates the percent of stocks on the NYSE on point & figure buy signals, remains negative, having given a triple bottom sell signal, and remains more than 2% away from a reversal up. The negative pattern of lower highs since the peak in January 2004 also remains intact.

So, while the broad market measures are up since the long-term context has changed, there has not yet been enough demand to improve the internal health of the market.

Meanwhile, the percent of stocks above their 50-day moving average for the NYSE is positive and rising, now at 50%...

... as is the percent of NYSE stocks above their 30-week moving average.

All of this movement by the 50-day moving average and 30-week moving average indicators, so far, is occurring while the long-term NYSE indicator remains negative, however.

On the Nasdaq, the situation is similar.

The long-term bullish percent for the Nasdaq remains negative...

...making lower highs since the January peak in 2004, but so far not a lower low, while the percent of Nasdaq stocks above their 50-day moving average is positive and rising, and the percent of Nasdaq stocks above their 30-week moving average is positive and rising.

It is important to understand the difference between the long-term bullish percent indices versus the 50-day and 30-week indicators. the bullish percent indices measure absolute supply vs. demand. In the point & figure methodology, by definition, a stock is controlled by demand when it gives a buy signal (a column of Xs exceeds a previous column of Xs). The only way this can happen, in the aggregate, is if there are more buyers than sellers.

The 50-day and 30-week moving average indicators, by contrast, can change to positive in a way that is not related directly to supply and demand as measured by point and figure buy and sell signals; for example, a moving average, if declining, can fall to a level where the stock can "cross over" without generating a new point and figure buy signal, or the moving average can remain realtively flat and the stock can cross over or under without moving enough to generate a new buy or sell signal.

The winning trade over the past year has been to sell breakouts in stocks and buy breakdowns. The charts of the NYSE and Nasdaq bullish percent reflect this as every move higher in demand has failed to reach the previous high in demand (columns of Xs have fallen short of previous columns of Xs). That is a great trade, until it stops working.

The outright sell signal on the NYSE Bullish Percent, in my opinion, is saying that one side of that trade is in danger of failing, at least for NYSE-based stocks. Selling strength (breakouts) and buying weakness (breakdowns) has been the way to trade the market for many months, but the fact that we are on an outright sell signal suggests to me that buying weakness is, for now, fraught with increased risk. The short-term positive developments can turn into long-term positives, but until that takes place, I have no choice but to remain disciplined and more focused on what can go wrong, than what can go right.

No positions in stocks mentioned.

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