December 23, 2007- Market Summary
In our last few reports, we've mentioned that market
breadth may influence the short-term direction of the
major indexes. We believe that this trading thesis remains
true as we head into the New Year even though the bulls have
worked hard to send prices higher. The majority of last week's
gain was attributable to Friday's better-than-expected consumer
spending report and positive earnings from the likes of Research
In Motion (Nasdaq:RIMM). Despite this news, we still
think it is a good idea to be skeptical when breaks higher
do occur.
Interestingly,
we noticed on Friday that there were approximately twice the
number of companies trading near the lower end of their respective
52-week ranges than there were issues trading near the highs.
On Friday, 6% of the issues that trade on the NYSE
Composite Index created new lows (207/3,441). A large
number of companies trading near their 52-week lows is often
associated with a downward trending market. Another point
worth mentioning is that there were 100 companies that created
new highs. This divergence between highs and lows brings back
our talk of the Hindenburg Omen, which usually signals market
corrections. We see it as another reason to remain cautious
as we head into 2008.
The chart of specific interest again this week is of the Russell
because it is trapped between the resistance of its 100-day
moving average and the 735 level. As you can see from the
chart below, many traders will now watch to see if the bears
will be able to prevent the index from falling below the 735
level because a break below would be used to suggest a continued
move lower. The recent weakness in the markets may be used
by traders as a sign to be cautious and it wouldn't be surprising
to see many remain on the sidelines for a few more weeks.
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