US Stock Market - More Weakness Ahead

Dow, S&P500 and Nasdaq index broke below their uptrend line on Friday. Volume has been picking up and this suggests real selling and not just profit taking.

The recent weakness started off from China when news broke that banks have been told to suspend lending. Although the suspension was not system wide, the market reacted nevertheless with Shanghai index moving down more then 3% and Dow closed nearly 1.1% lower. Adding to the uncertainty was US President Barack Obama proposal to overhaul US banks in order to avoid future financial crisis.

Technical charts are looking weak with MACD below its signal line and –DI above the +DI together with an increasing ADX value.

The support level for Dow is near the 10,000 level which is where the Fibonacci retracement is located. Expect to have more weakness next week.

US Market Update

Some negative signs are showing up in the technical charts for S&P500 index.

Firstly, the MACD indicator is about to make a bearish crossover. The –DI is above the +DI and RSI is seen to be turning down from overbought levels. All these signs point to a weaker market in the short term.

However having said that, the uptrend is still intact as the trend line connecting the lows is still not violated.

A test of the trend line is possible this week. A closed below the trend line is negative for the bulls whereas a successful test of the trend line followed by a rebound is a sign of trend continuation.

Let’s see how the market behave this week Happy trading!

Sentiment Indicator

Recently, I read a book that describes an indicator to measure the sentiment of the market. It uses data from data that is readily available from the CFTC website (http://www.cftc.gov).

This website provides a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by CFTC.

This information is useful because market tops and bottoms occur during extreme optimism and pessimism.

An example of the information available is given below: (http://www.cftc.gov/dea/futures/deacmesf.htm)

This example shows futures position for Canadian Dollar traded in the CHICAGO MERCANTILE EXCHANGE.

The “COMMERCIAL” traders are those that make use of the futures contract for hedging purpose. “NON-COMMERCIAL” traders refer to speculators that operate in the futures market.

An example of a sentiment indicator is the %long indicator (based on non-commercial data) which is computed using the formula:

%long = (number of long contracts)/(number of long contracts + number of short contracts)

This is a contrarian indicator meaning that when majority of the speculators that are holding “Long” positions, the probability that the market has reached a top is higher.

For more information please refer to the book

http://www.amazon.com/Sentiment-Forex-Market-Indicators-Strategies/dp/0470208236/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1208178773&sr=8-1