Though the market internals finished 2-1 positive on Thursday, the market is not out of the woods, so MoneyShow’s Tom Aspray technically studies the monthly charts of the major averages to see if they are giving off any strong warnings.

In late morning trading on Thursday, the bears were out in force as I received an urgent email to sign up for a “Crash Alert” by the end of the day. The major averages once again held the key monthly support as they had earlier in the month. Focusing on key price levels, as I discussed two weeks ago The Week Ahead: An Investor's Best Friend in Volatile Times, is the best approach in these volatile markets.

Though the market internals finished 2-1 positive, the market is not out of the woods as today’s weekly and monthly close is likely to tell us much more. Despite the explosive after hours rally in Amazon.com (AMZN), the S&P futures are down double-digits in early trading. The very high 3.61 reading in the ARMs Index on Wednesday is typically followed by a strong rally like we saw in December.

The Dow Industrials and Russell 2000 led the major averages higher with gains of 1.31% and 1.28% respectively. The home construction stocks were strong as the iShares US Home Construction (ITB) was up 3.32% in reaction to strong earnings from PulteGroup (PHM), which was up over 6%. As I noted in Are the Homebuilders Still in a Bear Market?, it will take more positive action to turn this industry group around.

The strongest market correction in this bull market was the 19.4% decline in 2011. As we finish January, the question is whether the monthly charts of the major averages are giving us any strong warnings?

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Chart Analysis: The monthly chart of the NYSE Composite shows the drop below the 20-month EMA in October, which is now at 10,268.

  • The quarterly pivot at 10,597 as been violated several times this week and a close below it would be negative.
  • The monthly projected pivot support is at 10,463 with the starc- band at 10,288.
  • The long-term uptrend connecting the 2009 and 2011 lows is at 9345.
  • The monthly NYSE Advance/Decline Line looks ready to end the month at a new high.
  • The A/D line is well above its long-term WMA and the support at line b.
  • The monthly OBV peaked in November and is now close to its WMA.
  • In June 2011, (line 1), the OBV dropped below its WMA and stayed below it for the next year.
  • There is monthly resistance now in the 10,900-11,000 area.

The Spyder Trust (SPY) formed a doji in December and a monthly close below $196.77 would trigger a monthly low close doji sell signal.

  • The quarterly pivot at $199.42 was tested early Thursday and a Friday close below this level would be a sign of weakness.
  • The monthly pivot support at $197.61 has held, and for February, the support is tentatively at $194.14.
  • The 20-month EMA is at $192.30 with the starc- band at $189.46.
  • The S&P 500 A/D line made a convincing new high in November and has just declined slightly from the highs.
  • The monthly OBV is declining and is now close to its WMA.
  • In August 2011, the OBV did drop below its WMA (line 2).
  • It moved to new highs in early 2013 as resistance at line f, was overcome.
  • There is monthly resistance now in the $206.50-$207 area.
  • The monthly projected resistance for February is at $206.40.

Next: Two More Major Averages to Watch

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The monthly chart of the PowerShares QQQ Trust (QQQ) shows a tight range over the past three months as it has made a slightly lower monthly low ($99.36 versus $99.55) in January.

  • The monthly support at $100.02 was tested Thursday with the quarterly pivot at $99.67.
  • The 20-month EMA is at $90.25 with the October low at $89.91.
  • The Nasdaq 100 A/D line made a new high last November and has since turned lower.
  • The monthly OBV looks ready to close the month on its WMA.
  • In 2011, the OBV peaked in February and then formed a lower high in May, line b.
  • This divergence was followed by a drop below its WMA in August, line 1.
  • The OBV resumed its uptrend in August 2012.
  • There is monthly chart resistance in the $105.53-$105.86 area.

The iShares Russell 2000 (IWM) formed a monthly doji in November with a low of $113.95. A monthly close below this level will trigger a LCD sell signal.

  • The quarterly pivot at $114.73 was violated twice during the month but not on a closing basis.
  • The monthly projected pivot support for January is a bit lower at $114.35 but will be at $114.81 in February.
  • The 20-month EMA is at $109.35 with the starc- band at $99.95.
  • The Russell 2000 A/D line did make a marginal new high in December.
  • The A/D line is now just slightly above its WMA with key support at line e.
  • The monthly on-balance volume (OBV) made a convincing new high in December but will turn lower this week.
  • It is well above its rising WMA and support at line f.
  • There is monthly resistance at $120.56-$121.41.

What it Means: It would take a very severe drop for the Spyder Trust (SPY) or iShares Russell 2000 to trigger a monthly LCD sell signal. However, a sharply lower close today could push some of the key ETFs below their quarterly pivot levels.

This could signal a trend change, as I reviewed in Pivotal 1st Quarter Price Levels, where you can also find the key pivot levels for many key ETFs.

How to Profit: No new recommendation.

Portfolio Update: Traders are 50% long the iShares Russell 2000 (IWM) at $116.88 and 50% long at $114.96 with a stop now at $113.88. On a move above $119.50 raise the stop to $114.44.

Traders are 50% long the Spyder Trust (SPY) at $200.80 OB and 50% at $200.20, stop $196.57. On a move above $205.75 raise the stop to $198.38.

Here are some of Tom’s recent articles you might enjoy:

Buy Apple on an Earning's Miss
Are the Homebuilders Still in a Bear Market?
The Week Ahead: Barron's Roundtable—Too Cautious Like 2013?
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