Chart of the Week 1/18/04

CHART OF THE WEEK – 1/18/04

Brett N. Steenbarger, Ph.D.

www.brettsteenbarger.com

Here we see that the NYSE Composite Index (the blue line) has been hovering in a roughly 1-2% range for over a week. We have had several thrusts to or near new rally highs, but no definitive breakout.

One of the best measures to validate breakout moves is the number of stocks making new highs versus new lows over a lookback period. Here our lookback period is 10 hours and we are examining 17 of the stocks that hold the highest weighting in the S&P 500, NASDAQ 100, and Dow 30 Indexes. The logic is that, if the market is going to sustain a breakout, these institutional favorites have to play along.

The chart clearly shows that, as of 1/16/04, the basket of stocks is not playing along. At most, only 6 of the 17 issues are making fresh ten-hour highs. What is happening is that, with each thrust upward and then down, stocks are rotating their leadership. They are not moving in unison. As a very rough rule, if more than half of the basket of stocks is not participating in a breakout move, it pays to be skeptical of that move.

Notice how, with the highs of late 1/16/04 (the last data points on the chart), the balance of new highs over new lows is zero. Unless this changes with an upside breakout move early Tuesday, I would not be chasing Friday’s late market strength and might even fade it depending on the status of the trend indicators.

Brett N. Steenbarger, Ph.D. is Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for MSN’s Money site (www.moneycentral.com). The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new co-edited book, The Art and Science of Brief Therapy (American Psychiatric Press) is due for release in the first half of 2004. Many of his articles and trading strategies are archived on his website, www.brettsteenbarger.com.