Let’s Look at the Indexes

Sep 1, 2007: 11:33 AM CST

This week brought new emphasis on the Stock Market from the broader community, as both the President and Federal Reserve Chairman made sweeping speeches underscoring their concern for falling stock prices on Wall Street.

While Bernake’s speech was not as reaffirming as Wall Street would have anticipated, traders were encouraged that the Federal Reserve is keeping the Interest Rate Cut option possibly on the table… or at least will be following economic conditions and will be prepared to act accordingly should action be warranted.

All the fundamentals aside, let’s go straight to the source and see what price and volume – as spoken through the charts – are telling us:

First, the Dow Jones:

  • Price has now broken above the declining trendline, established since late July and tested three times (validiation)
  • Price has now broken above all major moving averages – an extremely bullish sign
  • Price is sitting ticks above the flat 50 period EMA, signaling possible ‘indecision’
  • Price is officially trapped between the zones of the 50 period and 20 period Exponential Moving Averages
  • Volume on the most recent upswing declined, and volume has remained light this week as well

Next, the Nasdaq:

  • The Nasdaq is exhibiting a better technical picture than the Dow
  • Price clearly broke above the falling trendline from July (not annotated)
  • Price clearly broke above the flat 50EMA and rising 20 EMA and is comfortably above the 200 SMA.
  • Price is above the rising 200 SMA, indicating “Bulls are Winning” in the eyes of major traders
  • Volume has been relatively flat over the last two weeks, declining greatly from previous weeks

Finally, the S&P 500:

  • Price is absolutely trapped between the falling 50 EMA and flat 20 EMA
  • Price is above the key 200 SMA, but only by 20 points – not significant
  • Price fulfilled a recent positive momentum divergence
  • Price is finding resistance at the falling 50 EMA
  • Volume has been declining as well over the last two weeks relative to the previous two weeks
  • The recent rally occurred on less volume than the recent sharp decline

While not totally out of the clear, the major US Indexes are showing more resilience than they were last week.

The rally on light volume is a potential warning sign to the bulls, but the bulls have ‘taken over’ the moving average battle and have carved a more positive stance than they previously held

The price rally on Friday was due to a variety of reasons, including the “End of Month Buying” phenomenon, the “Holiday Effect” phenomenon, and the resulting Short-Covering (buying) due to these factors. Oh, and I’m sure the speeches of Mr. Bernake and Mr. Bush had something to do with it. J

Study well this weekend and enjoy the holiday!


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