Three Market Views
by Carl Swenlin
June 6, 2008

There are three market indexes that capture the most attention: The Dow Jones Industrial Average (DJIA), the S&P 500 Index (SPX), and the Nasdaq 100 Index (NDX). Together they represent about 80% of the total U.S. market capitalization. While they are normally more or less in sync with one another, this is not always the case, and now is one of those times where they don't look a lot alike.

Currently, the DJIA is the weakest of the two. It is on a long-term sell signal (the 50-EMA is below the 200-EMA), as well as an intermediate-term sell signal generated by our primary timing model. Looking at the chart we can see that the price index had broken above horizontal resistance and an important declining tops line that defined the bear market. Unfortunately, this breakout was a fakeout, and prices dropped below the support, leaving the DJIA in an unambiguous bear market configuration. The DJIA has only 30 stocks, but it has the most psychological impact on the public.

The broadest of the three markets is the SPX. Consisting of 500 stocks, it is the least likely to be distorted by individual stocks or sectors. The SPX is also on a long-term sell signal, but the intermediate-term signal is a buy. It has managed to break above the declining tops line, but is struggling the resistance of the 200-EMA and, as I write this, it is making a strong effort to break down again.

The NDX presents the most positive picture of the three. It switched back to a long-term buy signal about three weeks ago, and it has a nice profit on an intermediate-term buy signal. While I will treat the NDX strength at face value, I will also acknowledge that it is the odd-ball.

Bottom Line: Rather than being in agreement, the three major indexes we follow present different pictures. The DJIA and SPX present similar pictures, but one is negative and the other is still slightly positive. The NDX, on the other hand, is strongly positive. Will it lead the rest of the market higher? I have my doubts.

The problem the market faces at this time is that the rally from the March lows is in the process of being corrected, a process that will probably take several more weeks. The DJIA has already succumbed and turned negative, and the SPX is not far behind. And while the NDX has rallied faster than the broad market, it will probably move faster in reverse, turning negative in the end.

We rely on the mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.