Skip to main content

What does CMF say about the stock market this week?

Does this rally have any gas left? Don't know what CMF means? Hopefully, we can shed some light on both topics.

After a week of consolidation, where every day stocks struggled to close with a gain, I thought it might be a good idea to look at one of the indicators that takes into account the closing price relative to the high and low.

That indicator is Chaikin Money Flow. Developed by Marc Chaikin, the Chaikin Money Flow oscillator is calculated from the daily readings of the Accumulation/Distribution Line. The basic premise behind the Accumulation Distribution Line is that the degree of buying or selling pressure can be determined by the location of the Close relative to the High and Low for the corresponding period (Closing Location Value). There is buying pressure when a stock closes in the upper half of a period's range and there is selling pressure when a stock closes in the lower half of the period's trading range.

In this chart of the S&P 500, we can see the tails on the candlesticks have been rather long for the last five trading days while the closing prices have shown little gain or loss. As shown by Aroon, however, the primary trend is still very strongly up for this index.

We have used the Chaikin Money Flow indicator to evaluate whether the trend may be about to change. As can be seen at the bottom of the chart, CMF has been trending downward for most of August. This divergence with the main price trend is generally considered a warning signal that the current trend may be close to being exhausted.


The next chart shows the same indicators applied to the NASDAQ 100.


In this case we get nearly the opposite result!

Here again Aroon shows the primary trend is up but it appears to be weakening. Though the green Aroon UP line is still at its maximum value (this is very bullish), the red Aroon Down line has made a significant turn upward (a bearish development). All during the month of August, CMF has shown a divergence with the primary trend until the last two days when CMF finally started turning up.

Conclusion --

With respect to the S&P500, Chaikin Money Flow would seem to be telling us that the index is about to drop. We are getting a similar signal for the NASDAQ, that is, if you can ignore the last couple of days where CMF gained.

My interpretation is not that we are going to get a significant drop but that there is about to be another rotation in market leadership. The NASDAQ has recently shown the most weakness with CMF nearly going negative this week and the Aroon Down indicator strengthening. It may seem counter-intuitive but I think this recent negativity paves the way for the NASDAQ to again take the leadership role in this market.

Here's where I have to pull in some fundamental data in order to make the argument. With good numbers for tech in the Durable Goods report this week (read our post about it here) and Intel's bright outlook (read about it at Barron's), I think we will see investors begin to gravitate away from financials and back to tech. Indeed, the frothy action in financials recently is causing many observers to predict the market, or at least the financial sector, is ripe for a fall (see this post from Peridot Capitalist as one of several examples).

I suspect this rotation in leadership will pressure the S&P 500, allowing its CMF to get down to a more over-sold level. In the meantime, this rotation should support further gains in the NASDAQ and we could see its primary trend continue upward, confirmed by an increasing CMF.

Disclosure: none

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position.

This first post in the series starts at the beginning: getting good investment ideas.

Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets.

As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professionals and …

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. (Click here to read the original post)

With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas.

Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what to lo…