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Choppy Waters Heading Into Summer

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Clearly long-term momentum is waning.

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Readers are familiar with Erlanger Research's predilection for advanced and unique indicators. Sometimes, however, it is valuable to sit back and take a simple look at the market chart all by its lonesome:


The above chart is the weekly bar chart of the NASDAQ Composite Index. We threw in some trendlines to highlight what we see in this chart. In fact, the three blue lines are known as "speed" lines. We picked the NASDAQ because it has been the weakest index this year, and we wanted to determine just how much technical damage has been done. The NASDAQ actually broke below the top blue line in 2004, indicating it was unable to hold the vertical speed attained from its lows in 2002. In the past few weeks, the NASDAQ violated the second blue line, indicating it is now unable to hold the vertical speed seen since 2004. Clearly long-term momentum is waning.

That said, the magenta lines in the above chart show a bullish ascending triangle pattern. The almost flat top to this pattern was surpassed last year, and this year's weakness can be viewed as a test of that breakout. The rub is there is no more room for testing. A break below 2150 would destroy the bullish nature of the pattern, yielding a downside target as low as 1700-1800 area (the third blue line.)

The above chart of the SPY shows that put activity has understandably grown as the market fell last month. Our Option Rank rises as put activity (volume, open interest and premium levels) dominates over call activity. High option rank levels (when green) are setups for a market rally. Low option rank levels (when red) are setups for a market pullback. The current high level is a setup for a market rally.

Also in the chart above is the seasonal pattern for the SPY. There is very little seasonal heat going forward until mid-July, when weakness is indicated. Until mid-July basically anything from a seasonal point of view can happen – including rallies to test resistance.

No positions in stocks mentioned.

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