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McMillan Market Commentary 8/20/4


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#1 TTHQ Staff

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Posted 20 August 2004 - 08:19 AM

Stock Market

When a market is declining and reaches an oversold condition, as this market did a week ago, it is very rare to see it reverse upward so rapidly that it completely reverses the technical indicators on the first rally. However, that is what has happened: the major indices made new lows a week ago today, but then rallied for four straight days three of them strong, this week. Sometimes, such a rally would just be an oversold rally, but in this particular case all of our technical indicators have registered buy signals, and the averages have crossed above their 20-day moving averages. Thus, while it somehow seems premature, we have turned cautiously bullish.

The index price charts were the last of the indicators to fall in line. There was resistance near the July bottoms (roughly 530 on $OEX or 1082 on $SPX), and the 20-day moving average -- which thwarted the late July rally -- was declining and was just above the resistance areas. However, yesterday (Wednesday, August 18th), $SPX, $OEX, and $DJX all crossed above those levels (see Figure 1) and that is a bullish statement. QQQ is not quite as positive, although it has crossed above its 20-day moving average, but still faces resistance at 34. Today (Thursday) saw these averages pull back and test those 20-day moving average, and then they moved higher to close above them for the second straight day. Hence, we'd have to grade the price charts of these major averages as bullish, as long as they don't close back below those previously stated levels ($OEX 530; $SPX 1082).

The equity-only put-call ratios first showed signs of rolling over after Monday's close (August 16th). While the first day's reversal of a 21-day moving average might not seem important to the naked eye, our computer projections indicated that both the standard and weighted were, in fact, giving buy signals at that time. So these ratios (Figures 2 and 3) are now bullish. They will remain on buy signals unless they rise back above the recent peaks.

Market breadth has been extremely positive in this rally. This is another positive indicator.

Finally, the volatility indices ($VIX and $VXO) closed below 17 on Wednesday, which generated buy signals (in our opinion). The reason we judge that a buy signal is that $VIX had finally closed more than 3 points below its most recent high. Hence, it reversed and a spike peak reversal in $VIX is a buy signal.

So, everything is now on a buy signal. Perhaps the "shakiest" piece in the puzzle is the price action of the major averages. But if they continue to hold above their 20-day moving averages, or at least above the support levels mentioned above, then prices should eventually work higher. Is this "the" bottom for the next intermediate move higher? Probably not, although we will have to see how this market acts if it rallies to the top of the downtrending channel (see Figure 1). There is a lot of resistance remaining from the February, March, and June highs, and it will be hard to work through.


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