The Case For A Renewal Of The Downtrend

(Click To Enlarge Chart)

Over the month of November I have regularly presented the case for a bottom within the time window from November 26 to December 6. However, it would prudent to look at the alternate possibility that the decline that began in August is still in force. One excellent confirming indicator of the overall markets trend is the relative strength of the Nasdaq 100. The bottom panel of the above chart shows the QQQQ relative strength measured against the Wilshire 5000 index with a 10 period sma(green) and a 50 period sma(black). Uptrends in the broader markets have consistently occurred with the 10sma of the QQQQ RS greater than the 50sma. Notice how prior to the March to June rally the 10sma was trending upward and crossed above the 50sma when the Qs broke out. The RS itself was above the 10sma at that time as well. The reverse was true in September as the market was breaking down. Currently, with a highly heralded 5 day rally, the QQQQ RS is heading toward its October/November lows while the 10sma is trending down and below the 50sma. This does not support a continuation of the current rally. Perhaps we will see a retest of the November lows , or perhaps we will see a greater acceleration in the downtrend, but unless the Qs rally hard next week to move into a leadership role, I suspect the rally will falter.

In addition, we see that the RSI5 is nearly at 100 while the RSI14 has not moved above 50. The RSI14 will need to move above 50 to confirm this rally has legs. Finally, the McClellan Oscillator (not shown), has moved back up to its second highest level of the last two years. Having done so after only 5 days of rally on declining volume is certainly a negative. The indexes are approaching resistance at the 25dema, and I would consider any reversal on higher volume as a possible short opportunity for a retest of the November lows.

The following look like interesting short candidates: AAPL, BRCM, FAST, IACI, JOYG, MICC, PCAR, RIMM.

While I look to take advantage of a possible decline next week, I am still nibbling on the long side on leading stocks that could break out if we do get a Santa Claus rally. QCOR, PETS, EBS are doing well and I also like ISYS and SQNM.

As a side note, I did not see a lot of traffic at the stores for this crucial "Black Friday" sales day. I did not see a lot of traffic anywhere. My wife said she did not see any really good deals on the items she was looking for and felt like the sales ads were misleading. Perhaps there were deals on things we were not interested in, but her view on these things has usually been right in the past. I expect the results from today will be worse than expected which will be another negative for next week.