SYNTHESIS OF OVERALL MARKET INDICATORS

Throughout the past several months I've written an educational series on how to read the signals given off by the overall market. In total, we have discussed nine major market measures: 1) McClellan Oscillator Summation Index, 2) Investor's Intelligence survey, 3) New Highs and New Lows, 4) Advance/Decline Line, 5) McClellan Oscillator, 6) Arms Index (or Trin), 7) Put/Call Ratio, 8) Volatility Index and 9) Stocks Trading Above Their 200-Day Moving Average. (To review any of these measures in greater detail, please see our glossary of financial terms.)

Each of these measures gives the swing trader different information. The McClellan Oscillator Summation Index, Investor's Intelligence Figures, Advance/Decline Line and New Highs and Lows help the swing trader judge the market's overall health. Meanwhile, the McClellan Oscillator and Arms Index describe whether the market is overbought or oversold in the short term. They are key measures for the swing trader since they describe when the markets are prone to a reversal.

The Volatility Index and its cousin, the Put/Call ratio, are sentiment indicators. Sentiment indicators describe the current level of bullishness or bearishness in the market. When investors are too bullish or excessively bearish, the markets are apt to shift course. The % of stocks above the 200-day moving average also helps traders uncover key turning points in the market.

All of these measures are typically aligned against a major price index, such as the New York Stock Exchange Index. This Index is often used because it is the broadest measure of what is happening on that exchange. However, please note that the analysis below could also be replicated for the Nasdaq or the S&P 500.

Below you will find a chart of the NYSE. The index is currently in an Intermediate downtrend, which began in early March just below the 6800 level. The Intermediate downtrend line would be broken if the NYSE were to close above 6560. On Wednesday, June 1st, the NYSE hit a recovery peak of 6518--about 40 points below the down trendline. 

The NYSE closed near the 6200 level on three separate occasions near the beginning of May. After consolidating for several days, the index then rallied more than 300 points. The Minor trendline off the mid-May low is still intact. That means the NYSE is in a symmetrical triangle composed of a Minor uptrend line and Intermediate downtrend line. Note that the rally off the mid-May bottom has been on low volume. This is indicative of an oversold bounce as opposed to a rally that expresses strong bullish conviction.

The chart above includes the 50-, 150- and 200-day moving averages. The 150-day moving average is in the middle of the chart and is still rising. However, the NYSE index has recently fallen below this moving average, marking the beginning of the stage III topping process I have written about in previous issues. The 150-day moving average is at 6424. With Thursday's close of 6456 the NYSE is once again threatening to dip below its 150-day moving average.

Of the two indicators I've included above, MACD is on a buy signal. The histogram, however, is beginning to roll over. Stochastics is overbought, but has not yet given a sell signal.

What additional insight can be gained from the overall market indicators? Below you'll find a table of current readings for each of the overall indicators I've discussed in recent issues:

First, the McClellan Oscillator Summation index bottomed at approximately –1500 in early May. It has now recovered to +662. Any reading below +1000 is considered to be a bear market signal. Unless this indicator can recover significantly, it continues to warn of an impending bear market.

The Investor's Intelligence figure is now at 45%. The most recent peak was above 60--a level at which bull markets have reversed into bear markets. Again, this measure warns of a possible bear market.

The Advance/Decline line has created a double top, peaking at the same level in both March and April 2004. The Advance/Decline line has recovered during the rally that started in early May, and has now hit an important resistance level just below the support of the double top. The inability of this indicator to reach new highs provides us with yet another warning that a market peak has been established.

New Highs vs. New Lows on Thursday, June 2nd came in at 47 to 16. In early May we saw over 800 new lows. If a test of the May bottom were to occur at approximately 6200, and the NYSE at that time was to have fewer than 800 new lows, then that would be bullish divergence. For the new highs line to break its downtrend line, we would have to see over 200 new highs. So far this measure hasn't even come close to that level. This indicator is again consistent with a phase III market that is rolling over from a bull to a bear.

Turning to the shorter-term measures, which indicate the market's overbought/oversold state, we're now seeing a contradiction between the McClellan Oscillator, which is at +156, and the Arms Index, which is at 1.14. The McClellan Oscillator peaked last week at +318. As the NYSE has stalled out over the last several days, breadth has weakened and the Oscillator has moved back to more normal levels. However, at +156, the Oscillator is still very overbought. In contrast, a reading of 1.14 on the 10-day moving average of the Arms Index is very close to oversold. The typical oversold reading on this measure is 1.20, so it would not take much to bring the Arms to an oversold level again.

We're now seeing some contradiction between the Volatility Index and Put/Call ratio as well. The Volatility Index peaked at slightly above 20 in May. It has since fallen to 16 and is now back to 17.03--a relatively neutral reading. It is currently expressing neither confidence nor fear. The Put/Call ratio on Thursday was at 1.13. Any reading over 1.0 expresses a fearful, pessimistic market. The indicator that seems most telling is the Put/Call ratio, which after only moderate selling has moved to a very high level.

The % of stocks above the 200-day moving average is now at 57%. This indicator recently topped out above 90%, a historic level and one that typically marks reversals from bull to bear markets. The market does not generally put in major bottoms until this indicator falls below 30%, so we are definitely not there yet.

The overall market indicators provide a supplementary picture to the interpretation of the NYSE chart. Currently, they provide us with additional evidence for the possibility of a stage III top. They also indicate that despite little deterioration in price, sentiment has turned rapidly negative. With a contradiction between the McClellan Oscillator and the Arms Index, the market is certainly not oversold. A break of the Minor uptrend line and a piercing of the 150-day moving average is certainly possible.

The overall market indicators are most clear in their message when the market is at an oversold or overbought extreme. With the NYSE now in a symmetrical triangle pattern, that is not presently the case. However, these indicators are still valuable to analyze, as they provide us with additional insight into the NYSE price chart.

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