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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
May 22, 2017
U.S. stock market price indexes confirmed a continuing medium-term correction or consolidation phase.
Preview from my weekly report*
The majority of investors were extremely optimistic in the 4 months after the November election, and stock valuations rose to high levels that many investors thought to be excessively expensive by historical standards. Since the stock price peaks on 3/1/17, corporate earnings were stronger than analysts expected, but stock prices ignored that good news, lost upside momentum, and turned choppy. Doubts about the prospects for tax reform and the economic outlook, in addition to political conflicts in the U.S. and rising geopolitical tensions abroad, appear to have led to a more neutral and cautious approach by traders and investors, compared to the previous enthusiasm from November, 2016, to March, 2017.
On Balance Volume (OBV) continues to lag price, showing bearish divergence. Currently, OBV is nearer to its lows for the year, while the price index is nearer its highs. Volume on up days has been less than volume on down days since late February, suggesting deteriorating buyer confidence.
Short-term price momentum fell to its lowest level in 5 weeks last Wednesday and continues to lag price, signaling a bearish divergence, as quantified by RSI(14).
The Dow Theory confirmed a medium-term, "Secondary Reaction" downside correction phase in April. In March, we warned, "The bearish divergence signaled by the breakdown by the Dow Jones Transportation Average below 4-month lows could indicate a more prolonged correction beyond the typical 2-4 weeks short-term pullback."
Contrary Thinking: investor sentiment is mostly neutral. Sentiment indicators are not always useful for precise market timing, but rather they are considered to be background factors that sometimes set the stage for potential price turning points. The stock market tends to swing from one extreme to the opposite extreme as human emotions swing from greed to fear and back again. When sentiment hits an extreme, we become more alert for turning points. The current data shows the $VIX Volatility Index and the Equity Put/Call ratio were briefly more erratic but quickly returned to neutral. The latest AAII survey indicates some shift toward more bearish sentiment, which could be potentially bullish if the shift continues, with 23.85% Bullish, 41.90% Neutral, and 34.25% Bearish. The CNN Money Fear & Greed Index fell to a neutral 49, down from moderate greed at 62 a week earlier.
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