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Stock Market Technicals For Week of March 18, 2019

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  • All major U.S. stock indexes ended the week higher.
  • Technical conditions improved last week.
  • Quant analysis indicates neutral short-term bias for next week.

Recap (March 11, 2019 – March 15, 2019) The S&P 500 rose 2.89%, Dow Jones Industrial Average gained 1.57%, NASDAQ added 3.78% and the Russell 2000 increased by 2.08%. The 10-year Note yield fell four basis points to 2.59%.

Last week we wrote:

Although the pattern in S&P 500 is bearish, a rebound before another correction is also possible for next week.

The S&P 500 broke above resistance at 2815 to close 7 points higher for the week at 2822.48

The next important resistance level is 1.7% higher at around 2871. Support is around 2747.

The S&P 500 has gained 16.8% in the last 12 weeks. This is the largest 12-week gain since 17.5% in February 2012 and before a 10% correction that started in April of that year. The chart below shows 12-week gains larger than 15%.

After a large gain a correction may follow but samples of extreme events are small and uncertainty is high. Despite that it may make sense for the market to take a breather at this point.

It may be worth noticing that the maximum 7-year S&P 500 total return since 1988 was realized in 1999 at around 292%, as shown below.

After a steady decrease and a violent drop to 7-year total return of about -10% in 2008, performance increased steadily with the help of central banks and corporate buybacks but since 2015 it is again on a downtrend towards the mean of about 107%. As we have argued in this blog before, even with significant support, the market has failed to deliver high performance as in 1990s and if this becomes a widespread realization, then more severe problems could arise.

Momersion measures the relative state of momentum versus mean-reversion in daily returns. The DJIA chart below shows persistent high levels of Momersion since mid 2017.

Note that Momersion rose temporarily above 54 in 2007 before the market top and bear market that followed. Although this is a sample of one, periods of high momentum may be followed by reversion to mean caused by a rapid correction.  Note how Momersion also rose above 52 before the 2011 correction. A prolonged high level of Momersion in DJIA is probably unsustainable and could end with a correction.

One significant development has taken place in the fixed income markets with the 10-Year Note yield falling four basis point above the year low at 2.55%.

The massive inverse head and shoulders pattern fooled chart pattern traders. The break above the neckline as shown ended with a throwback and a test of support. Yields may fall to lower levels if support around 2.55% does not hold.

Quant analysis of weekly directional bias of Dow Jones Industrial Average

Note that the directional bias may lag price action due to changes in short-term market dynamics. In addition, prolonged strong positive (negative) bias may be indication of overbought (oversold) conditions. The bias is calculated with DLPAL LS software.

Dow 30 analysis shows neutral bias as of the close of March 15, 2019.

There are 19 stocks with positive directional bias and 11 stocks with negative. The ratio of positive to total is 0.63. A ratio above 0.70 normally indicates strong positive bias and a ratio below 0.50 usually indicates strong negative bias.

Overbought/Oversold Dow Stocks in weekly timeframe

Overbought conditions occur when value of PAL OB/OS indicator is greater than 90 and oversold when the value of the indicator is less than 10. 

There are no oversold or overbought stocks in the weekly timeframe.

Charts are included in Stocks and ETFs to Watch report.

Overbought/Oversold ETFs in weekly timeframe

Overbought conditions occur when value of PAL OB/OS indicator is greater than 90 and oversold when the value of the indicator is less than 10. 

Utilities (XLU) are overbought. There are no oversold ETFs.

Charts are included in Stocks and ETFs to Watch report.

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Specific disclaimer: This report includes charts that may reference price target levels determined by technical and/or quantitative analysis. No updates to charts will be provided if market condition changes occur that affect the levels on the charts and/or any analysis based on them. All charts in this report are for informational purposes only. See the disclaimer for more information.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

Charting program: Amibroker

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