Quick Quad Stock Index Checkup for March 27

Mar 27, 2011: 6:20 PM CST

There are two main facts to know about the current chart structure for the four main US Stock Market indexes:

First, ALL indexes have broken above a critical trendline and the 20/50 day EMAs

Second, Volume has declined steadily as price rallied above these key levels.

Let’s see how these two facts played out in the four main indexes and what quick levels to reference in the week ahead.

First, the Dow Jones:

While there’s a lot I could say about the other factors on the daily chart (reference subscriber reports for more detailed daily and weekly analysis), I’ll focus the attention in this post on the two factors above:

The clean price breakthroughs above confluence resistance (trendline and 20/50 day EMAs) and the declining volume pattern on the rally, along with key turning point levels to watch.

The Dow Jones broke back above its key 12,000 ’round number’ reference level along with the falling trendline and the 20/50 day EMAs all near 12,000.

Each day of the rally showed LOWER volume than the prior day for the most part.

So – as we’ll see in the rest of the indexes in pictures more than words – we have a big bullish factor in the breakthroughs of support (which target retests of recent highs), we have a similarly strong bearish factor in the clean divergences with price and volume.

That means you should treat each day very carefully given these conflicting signals and follow price – namely if it keeps moving higher to the short-term upside targets… or down suddenly back under these key support levels.

So for the Dow, watch to see if buyers can move the index cleanly above 12,400 and if so, continue playing long for continued breakouts.  Otherwise keep a close eye on the 12,000 multi-factor confluence which opens the door for a move back to 11,600 or as low as 11,000 on a deeper pullback.

The picture is identical in the popular S&P 500 index:

The S&P 500 broke its key 1,300 confluence level along with the falling trendline at 1,310 – doing so on cleanly diverging (declining) volume.

Thus, look to play long on a continuation bullish move above 1,320 to target the 1,345 level; and on the downside, keep focusing on the 1,290 to 1,300 pivot which opens a swing down to 1,250 then 1,200.

The NASDAQ:

The same thing happened in the NASDAQ with the bullish breakthroughs above resistance at the 2,725 level which opens a play to 2,800 then 2,850.

A re-breakdown under 2,700’s confluence support opens the door simply to 2,600 then 2,475/2,500.

Finally, the “Small Cap” Russell 2000 Index:

The Small-Cap Russell 2000 Index held its own with the recent “Japan” pullback and DID NOT breakdown to new 2011 lows like the other three main indexes did.

Small Caps have therefore shown Relative Strength to the other indexes and that alone is a bullish sign – as the NASDAQ and Russell have a tendency to lead the S&P 500 and Dow Jones at major turns.

With that in mind, look to see that the Russell Index was less than 1% away from making a NEW RECOVERY HIGH on Friday’s session – if you weren’t watching this index, you may have missed that.

In contrast, the other three indexes were still down 2% and 3% from Friday’s high to the recent recovery peak in February 2011.

If bullish buying action continues like this, we will see new recovery highs in all indexes.

Volume sends a message that new highs are less likely to happen, which price – as long as it stays above the respective support levels in all indexes as seen above – sends a message that new highs – or at a minimum a retest of the old highs – is indeed likely.

Were it not for the bearish signal from volume, we’d be full force ahead to expecting the near-certainty of higher highs yet to come but until those highs occur, it may pay to be cautious.

If we start to breakdown under the key levels above, then volume’s signals will be the correct ones.  If not, then volume was just one more non-confirmation divergence this non-stop QE2-influenced bull market blew through!

In the week ahead, keep mindful of these up and down levels and play accordingly.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

5 Comments

5 Responses to “Quick Quad Stock Index Checkup for March 27”

  1. Hudson Eldridge Says:

    Your charts show a short term break of trend but a lot of others don't. I see that a lot. My charts from Fidelity says indexes stayed under and vol was low.

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    […] As I mentioned last night from a price and volume perspective, the rally strongly broke above critical confluence resistance levels in all indexes. […]

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