Friday, November 05, 2004
Market Update: Very Bullish going into year end
dated 5 Nov 2004, 11.00pm
The S&P has scored 8 consecutive up days ever since leaving an inverted graveyard doji on its daily chart on Oct 25. Not only that, Thursday (yesterday) was yet another Real Accumulation Day (RAD), making it the fourth in a mere eight trading days. If I were a bullish prognosticator on CNBC, I might take the microphone and say "the bears can shut up". Yet as traders, we must all display a much greater level of emotional control.
The S&P carved out a bullish 1-2-3 Swing-to-a-Test on the weekly chart with the 3-point support line defined by the March, May and August interim swing lows. What was the test? Well, that takes a bit of explaining. During the period of July 2002 to March 2003, when everyone was so very bearish, the S&P carved out an inverse head-and-shoulders pattern, and the neckline of that pattern was 960. Eventually, the S&P broke that neckline during May 2003 and in so doing, delivered a strong buy signal. The inverse head-and-shoulders pattern projected to S&P 1160, and that target was indeed hit in March 2004.
I have mentioned that the half-way mark is important. Well, the half-way mark, or 50-percent retractement of the breakout of the inverse H&S neckline over 960 to the S&P cyclical high of 1160 is 1060. This suggested that any decline that tested 1060 would likely be a significant inflection point, whose subsequent behaviour would tell important characteristics of the market.
Eventually, the S&P carved out a 1-2-3 Swing-to-a-Test on its weekly chart, testing the pivotal 1060 level. The Test resolved successfully and resoundingly to the upside, and the S&P went on the explode over its 3-point declining trendline on the weekly chart. The trendline was broken convincingly on trade above 1140. Since the difference between 1140 and 1060 is 80 S&P points, this suggests a projection to S&P 1220 (derived from 1140+80). This is my next swing target to the upside.
After the 1-2-3 pullback on the weekly chart (a 1-2-3 pullback is classic market action to mark a correction in an on-going bull market), the S&P delivered a Real Accumulation Week and left a Su Ping Buy Signal on the weekly chart. If all goes well today, this week should mark another RAW, making it the second in a row. Two RAWs in a row is as bullish a setup as you can get. And all this coming on having four RADs within this two-week timespan, a successful downturn of its monthly chart in which the S&P quickly found a low in price and time, and rebounded strongly, not to mention also a bullish RSI.
As I am writing this at 10.52pm Friday, the S&P has already cleared its 2004 high, something I projected yesterday but did not really expect to happen until a decent pullback had occured. Well folks that's what a genuine bull market is like --- it goes up without most people (including yours truly --- I am 100% cash now).
On hindsight, it now appears that the March 2004 - August 2004 correction might simply have been a consolidation phase to work off the 2003 epic rally. If that is indeed the case, and this consolidation zone marks the 50% mark of the current cyclical bull run, then the S&P should eventually test 1350, and possibly, it's all time high.
The secular bear market can take all its time in the world to come back. I'm certainly not waiting.
dated 5 Nov 2004, 11.00pm
The S&P has scored 8 consecutive up days ever since leaving an inverted graveyard doji on its daily chart on Oct 25. Not only that, Thursday (yesterday) was yet another Real Accumulation Day (RAD), making it the fourth in a mere eight trading days. If I were a bullish prognosticator on CNBC, I might take the microphone and say "the bears can shut up". Yet as traders, we must all display a much greater level of emotional control.
The S&P carved out a bullish 1-2-3 Swing-to-a-Test on the weekly chart with the 3-point support line defined by the March, May and August interim swing lows. What was the test? Well, that takes a bit of explaining. During the period of July 2002 to March 2003, when everyone was so very bearish, the S&P carved out an inverse head-and-shoulders pattern, and the neckline of that pattern was 960. Eventually, the S&P broke that neckline during May 2003 and in so doing, delivered a strong buy signal. The inverse head-and-shoulders pattern projected to S&P 1160, and that target was indeed hit in March 2004.
I have mentioned that the half-way mark is important. Well, the half-way mark, or 50-percent retractement of the breakout of the inverse H&S neckline over 960 to the S&P cyclical high of 1160 is 1060. This suggested that any decline that tested 1060 would likely be a significant inflection point, whose subsequent behaviour would tell important characteristics of the market.
Eventually, the S&P carved out a 1-2-3 Swing-to-a-Test on its weekly chart, testing the pivotal 1060 level. The Test resolved successfully and resoundingly to the upside, and the S&P went on the explode over its 3-point declining trendline on the weekly chart. The trendline was broken convincingly on trade above 1140. Since the difference between 1140 and 1060 is 80 S&P points, this suggests a projection to S&P 1220 (derived from 1140+80). This is my next swing target to the upside.
After the 1-2-3 pullback on the weekly chart (a 1-2-3 pullback is classic market action to mark a correction in an on-going bull market), the S&P delivered a Real Accumulation Week and left a Su Ping Buy Signal on the weekly chart. If all goes well today, this week should mark another RAW, making it the second in a row. Two RAWs in a row is as bullish a setup as you can get. And all this coming on having four RADs within this two-week timespan, a successful downturn of its monthly chart in which the S&P quickly found a low in price and time, and rebounded strongly, not to mention also a bullish RSI.
As I am writing this at 10.52pm Friday, the S&P has already cleared its 2004 high, something I projected yesterday but did not really expect to happen until a decent pullback had occured. Well folks that's what a genuine bull market is like --- it goes up without most people (including yours truly --- I am 100% cash now).
On hindsight, it now appears that the March 2004 - August 2004 correction might simply have been a consolidation phase to work off the 2003 epic rally. If that is indeed the case, and this consolidation zone marks the 50% mark of the current cyclical bull run, then the S&P should eventually test 1350, and possibly, it's all time high.
The secular bear market can take all its time in the world to come back. I'm certainly not waiting.
Thursday, November 04, 2004
Market Update
by Ng E-Jay, dated 4 Nov 2004, 10.00pm
On Tuesday, the indices carved out a seemingly bearish graveyard doji candlestick when, after moving higher at first, they reversed sharply on exit polls showing Kerry having the lead. The S&P reversed off the pivotal 1140 level, which is not surprising given that it has basically gone straight up since Oct 26. A decline looked to be a given. Then surprisingly on Wednesday after it had become clear that Bush was the winner, the markets gapped up strongly and the S&P closed the day near 1143. Traders who positioned themselves short on Tuesday's reversal were cooked on Wednesday. Indeed, it would be wise to remember: neither a bull nor a bear be --- until the market proves itself.
A turndown of the S&P daily chart will provide important clues as to the nature of this rally, as will the behaviour of the S&P around Nov 7, the latter date being square the weekly closing high of 1157 for the S&P this year. Already the S&P has turned its monthly chart up on trade above 1142.05, so the next few day's market action will be critical. I am expecting a correction to work off the overbought condition here, so traders should continue taking profits into strength, as I've been stressing the past few days. The S&P can correct to 1123 without harming the bullish picture one iota, whose successful test should again provide a buying opportunity.
Indeed, the big picture remains intact, despite the coming correction that I fully anticipate. Here's why:
(i) Both the S&P and the NASDAQ scored Real Accumulation Weeks last week. A Real Accumulation Week is a week in which the percentage GAIN is more than the 10-week average of the absolute weekly range divided by the previous week's close, coming on volume greater than the 10-week moving average of volume.
(ii) The S&P and the NASDAQ scored Real Accumulation Days last week, and the S&P scored a third one on Wednesday. Such RADs coming in close proximity is very bullish.
(iii) The S&P displayed bullish behaviour on downturn of its monthly chart in October, by finding a low quickly at the corner numbers 1089/1090 and reversing strongly over the next several trading days.
(iv) There is an inverse head-and-shoulders pattern on the S&P which projects to 1180/1190. The S&P broke through its neckline on trade above 1123 last week.
(v) There is 1-2-3 Power Surge setup on the NASDAQ weekly chart.
(vi) The S&P has successfully staged a Rule-of-4 breakout over the 3-point declining trendline defined by the March, April and June highs on the weekly chart.
(vii) By delivering an outside up week last week, the S&P left a Suping buy signal on the weekly chart, and the week completely engulfed not just one, but two previous weeks' worth of market action.
(viii) The NASDAQ displayed bullish behaviour on the first Plus-One Minus-Two pattern on its weekly chart since the August swing lows. If the Plus-One Minus-Two on the NASDAQ weekly chart is assumed to be the midpoint of the current advance, then the NASDAQ's target should be around 2100.
In my opinion, the market will have proven itself if "good" behaviour persists past Nov 7, that is, a mild correction to work off the overbought condition followed by successful test and holding of key support levels. If this happens, there is a very good chance of the S&P and NASDAQ trading above their March (resp. Jan) highs and making yet another positive year in what is supposedly a secular bear market. Now you know why a secular bear market does not give one the right to short willy-nilly. Indeed, just trade what IS, not what you think should BE.
by Ng E-Jay, dated 4 Nov 2004, 10.00pm
On Tuesday, the indices carved out a seemingly bearish graveyard doji candlestick when, after moving higher at first, they reversed sharply on exit polls showing Kerry having the lead. The S&P reversed off the pivotal 1140 level, which is not surprising given that it has basically gone straight up since Oct 26. A decline looked to be a given. Then surprisingly on Wednesday after it had become clear that Bush was the winner, the markets gapped up strongly and the S&P closed the day near 1143. Traders who positioned themselves short on Tuesday's reversal were cooked on Wednesday. Indeed, it would be wise to remember: neither a bull nor a bear be --- until the market proves itself.
A turndown of the S&P daily chart will provide important clues as to the nature of this rally, as will the behaviour of the S&P around Nov 7, the latter date being square the weekly closing high of 1157 for the S&P this year. Already the S&P has turned its monthly chart up on trade above 1142.05, so the next few day's market action will be critical. I am expecting a correction to work off the overbought condition here, so traders should continue taking profits into strength, as I've been stressing the past few days. The S&P can correct to 1123 without harming the bullish picture one iota, whose successful test should again provide a buying opportunity.
Indeed, the big picture remains intact, despite the coming correction that I fully anticipate. Here's why:
(i) Both the S&P and the NASDAQ scored Real Accumulation Weeks last week. A Real Accumulation Week is a week in which the percentage GAIN is more than the 10-week average of the absolute weekly range divided by the previous week's close, coming on volume greater than the 10-week moving average of volume.
(ii) The S&P and the NASDAQ scored Real Accumulation Days last week, and the S&P scored a third one on Wednesday. Such RADs coming in close proximity is very bullish.
(iii) The S&P displayed bullish behaviour on downturn of its monthly chart in October, by finding a low quickly at the corner numbers 1089/1090 and reversing strongly over the next several trading days.
(iv) There is an inverse head-and-shoulders pattern on the S&P which projects to 1180/1190. The S&P broke through its neckline on trade above 1123 last week.
(v) There is 1-2-3 Power Surge setup on the NASDAQ weekly chart.
(vi) The S&P has successfully staged a Rule-of-4 breakout over the 3-point declining trendline defined by the March, April and June highs on the weekly chart.
(vii) By delivering an outside up week last week, the S&P left a Suping buy signal on the weekly chart, and the week completely engulfed not just one, but two previous weeks' worth of market action.
(viii) The NASDAQ displayed bullish behaviour on the first Plus-One Minus-Two pattern on its weekly chart since the August swing lows. If the Plus-One Minus-Two on the NASDAQ weekly chart is assumed to be the midpoint of the current advance, then the NASDAQ's target should be around 2100.
In my opinion, the market will have proven itself if "good" behaviour persists past Nov 7, that is, a mild correction to work off the overbought condition followed by successful test and holding of key support levels. If this happens, there is a very good chance of the S&P and NASDAQ trading above their March (resp. Jan) highs and making yet another positive year in what is supposedly a secular bear market. Now you know why a secular bear market does not give one the right to short willy-nilly. Indeed, just trade what IS, not what you think should BE.
Wednesday, November 03, 2004
Market Update dated 3 Nov 2004, 10.30pm
Market Update
dated 3 Nov 2004, 10.30pm
Sometimes it seems the only reason technical analysts like myself write reports is to keep folks out of the market at the best times. As they say, a bull market is defined to be one in which the market goes up without you. Not too long ago quite a few people including yours truly were giving scary downside targets like S&P 1025. Now these same folks including yours truly proclaim the market too risky to be fully long all the way from S&P 1111 (major pivot) to S&P 1146 (today's open). Those who were humiliated on the downside are now humiliated on the upside. As below, so above.
Yet the market is what it is, and we must trade what is, rather than what we think should be. That means paying attention to indicators, observing key inflection points, and practicing risk management. That means being able to reverse one's stand at the toss of a coin. And that means accepting the fact that the market is always right. Never make "campaign trades", buying or selling simply because you think the fundamentals must make the stock or commodity go in your desired direction. A secular bear market does not give one right to the short the market willy-nilly, as the past two years have amply demonstrated. In other words, never let your market position (your fundamental views) interfere with your best interests. And your best interests are always capital preservation and capital growth.
Because of what happened during the 1990's mania and the subsequent bursting of the bubble, some folks became bearish prognosticators and insisted on playing the downside all the time and hoping that the market will validate their views with the passage of time. However, as I have said, time is more important than price --- it is not the ultimate upside or downside target of the market that matters, but the time in which it takes to get there. Remember, the market can remain irrational longer than you are solvent.
More importantly however, campaign trades and an over-adherence to the fundamental picture takes attention away from short term price action and profit opportunity. In a persistent bull market, any fool can make money by simply buying and holding. But in a secular bear market or in a sideways market such as what we have witnessed over the past nine months or so, the big money is not made by buying and holding, or for that matter, shorting and holding. The big money is made by gaming swings in individual stocks and indices, by playing the price action over all time frames --- hourly, daily, weekly, monthly, quarterly.
My view of the market remains unchanged. I still think all spikes up are selling opportunities, and that the market will continue to do what everyone least expects. Nevertheless, given the price action, I will not rule out another test of this year's high of S&P 1163 and NASDAQ 2150 --- sometime later, but not now. Now, we sell.
dated 3 Nov 2004, 10.30pm
Sometimes it seems the only reason technical analysts like myself write reports is to keep folks out of the market at the best times. As they say, a bull market is defined to be one in which the market goes up without you. Not too long ago quite a few people including yours truly were giving scary downside targets like S&P 1025. Now these same folks including yours truly proclaim the market too risky to be fully long all the way from S&P 1111 (major pivot) to S&P 1146 (today's open). Those who were humiliated on the downside are now humiliated on the upside. As below, so above.
Yet the market is what it is, and we must trade what is, rather than what we think should be. That means paying attention to indicators, observing key inflection points, and practicing risk management. That means being able to reverse one's stand at the toss of a coin. And that means accepting the fact that the market is always right. Never make "campaign trades", buying or selling simply because you think the fundamentals must make the stock or commodity go in your desired direction. A secular bear market does not give one right to the short the market willy-nilly, as the past two years have amply demonstrated. In other words, never let your market position (your fundamental views) interfere with your best interests. And your best interests are always capital preservation and capital growth.
Because of what happened during the 1990's mania and the subsequent bursting of the bubble, some folks became bearish prognosticators and insisted on playing the downside all the time and hoping that the market will validate their views with the passage of time. However, as I have said, time is more important than price --- it is not the ultimate upside or downside target of the market that matters, but the time in which it takes to get there. Remember, the market can remain irrational longer than you are solvent.
More importantly however, campaign trades and an over-adherence to the fundamental picture takes attention away from short term price action and profit opportunity. In a persistent bull market, any fool can make money by simply buying and holding. But in a secular bear market or in a sideways market such as what we have witnessed over the past nine months or so, the big money is not made by buying and holding, or for that matter, shorting and holding. The big money is made by gaming swings in individual stocks and indices, by playing the price action over all time frames --- hourly, daily, weekly, monthly, quarterly.
My view of the market remains unchanged. I still think all spikes up are selling opportunities, and that the market will continue to do what everyone least expects. Nevertheless, given the price action, I will not rule out another test of this year's high of S&P 1163 and NASDAQ 2150 --- sometime later, but not now. Now, we sell.
Market Update dated 3 Nov 2004
Market Update
dated 3 Nov 2004
The oversold rally is still going very strong, and it appears that the market is pricing in a US election outcome that is based on certainty, rather than the fiasco that we witnessed in 2000. Yet, it is always helpful to remember that the market often looks best when it can look no better.
The S&P has rallied 5 days continuously and gained over 30 points without even so much as a downturn of its daily chart. It sailed through all resistance like it was thin air, and it is now poised to turn its monthly chart up on trade above 1142.05. As usual, it is not the upturn of the monthly chart per se that is significant, but the S&P's subsequent behaviour. The behaviour of the S&P going into Nov 7 will also be crucial since the date Nov 7 is square the weekly closing high of S&P 1157 for this year.
Sentiment indicators are still mixed. The 10-day moving average of the CBOE put/call ratio has fallen rapidly and may start to cut up early next week. When this indicator finds a low and cuts up, it usually signifies that it is very late in the rally. On the other hand, the Investor's Intelligence and AAII weekly survey readings have backed down a little from the excessively bullish readings registered previous week. While the II readings are still considered very bullish, the AAII readings are moving more towards neutral territory. In addition, the monthly optimism survey conducted by UBS shows too few bulls. In the past, when some sentiment indicators showed too many bulls and others showed too few bulls, the market tended to make a fast move in one direction followed by a sharp reversal in the other. In my opinion, we might be seeing a quick move to the upside now, followed by a decline after the election.
The intermediate-term indicators have stopped falling and seem to be trying to cut upwards. However, this does not mean they are maximum oversold. For example, a "what-if" analysis performed on the McClellan Summation Index based on NYSE breadth shows that even with positive days ahead, the indicator would only chug reluctantly higher. Any rally here will tend NOT to be confirmed by the indicator. Instead, intermediate-term indicators might become maximum oversold one to two weeks after election day. That would represent a far better buying opportunity.
With regards to the short-term indicators, the oscillator is overbought but not maximally so --- there is still a chance for the oscillator to reach maximum overbought by Thursday or Friday. The number of new highs continues to lag the readings registered in early October, as does the 10-day moving average of new highs minus new lows. This is despite the fact that the S&P is around the same level now as early October, and the NASDAQ is in fact higher. This negative divergence coupled with the overbought oscillators shows that if the market spikes up strongly now, it would be a great chance to do some selling.
dated 3 Nov 2004
The oversold rally is still going very strong, and it appears that the market is pricing in a US election outcome that is based on certainty, rather than the fiasco that we witnessed in 2000. Yet, it is always helpful to remember that the market often looks best when it can look no better.
The S&P has rallied 5 days continuously and gained over 30 points without even so much as a downturn of its daily chart. It sailed through all resistance like it was thin air, and it is now poised to turn its monthly chart up on trade above 1142.05. As usual, it is not the upturn of the monthly chart per se that is significant, but the S&P's subsequent behaviour. The behaviour of the S&P going into Nov 7 will also be crucial since the date Nov 7 is square the weekly closing high of S&P 1157 for this year.
Sentiment indicators are still mixed. The 10-day moving average of the CBOE put/call ratio has fallen rapidly and may start to cut up early next week. When this indicator finds a low and cuts up, it usually signifies that it is very late in the rally. On the other hand, the Investor's Intelligence and AAII weekly survey readings have backed down a little from the excessively bullish readings registered previous week. While the II readings are still considered very bullish, the AAII readings are moving more towards neutral territory. In addition, the monthly optimism survey conducted by UBS shows too few bulls. In the past, when some sentiment indicators showed too many bulls and others showed too few bulls, the market tended to make a fast move in one direction followed by a sharp reversal in the other. In my opinion, we might be seeing a quick move to the upside now, followed by a decline after the election.
The intermediate-term indicators have stopped falling and seem to be trying to cut upwards. However, this does not mean they are maximum oversold. For example, a "what-if" analysis performed on the McClellan Summation Index based on NYSE breadth shows that even with positive days ahead, the indicator would only chug reluctantly higher. Any rally here will tend NOT to be confirmed by the indicator. Instead, intermediate-term indicators might become maximum oversold one to two weeks after election day. That would represent a far better buying opportunity.
With regards to the short-term indicators, the oscillator is overbought but not maximally so --- there is still a chance for the oscillator to reach maximum overbought by Thursday or Friday. The number of new highs continues to lag the readings registered in early October, as does the 10-day moving average of new highs minus new lows. This is despite the fact that the S&P is around the same level now as early October, and the NASDAQ is in fact higher. This negative divergence coupled with the overbought oscillators shows that if the market spikes up strongly now, it would be a great chance to do some selling.
Sunday, October 31, 2004
Technical Update: Sentiment is the only spanner in the works
Technical Update: Sentiment is the only spanner in the works
dated 31 Oct 2004
The S&P staged a Real Accumulation Day on both Tuesday and Wednesday, and the NASDAQ followed suit on Wednesday. The S&P successfully defended the critical 1094-1104 support zone, and sailed through almost all conceivable resistance to close the week at 1130. The price 1130 should theoretically be the final resistance that stands in the way of the S&P challenging its yearly high in the 1157-1163 zone. But whether the S&P indeed challenges its 2004 high, is again, another issue.
Let us first examine the positives in the market now. The S&P staged back-to-back Real Accumulation Days, something it only did so during the Oct 2002 and the March 2003 lows, ever since the 2000 peak. As you might well recall, both the Oct 2002 and March 2003 lows led subsequently to significant rallies. In addition, the S&P carved out an outside up week and left a Suping Buy Signal on the weekly chart. Not only did the outside up week completely engulf last week's action, but it also completely engulfed the previous week's action --- making the engulfing candlestick on the weekly chart large enough to engulf two week's market action.
The powerful reversal by the S&P started when the S&P rebounded off 1089/1090 on Oct 26. Interestingly, 1089 is opposition 1157, the latter being the weekly closing high this year for the S&P. In addition, the date Oct 26 is square 1163, the latter being the intraday high this year for the S&P. Folks, we are seeing a price-time square-out at this very moment. The market is talking and we should listen!
The two RADs issued by the S&P completely offset two previous Real Distribution Days issued in October (there were 4 in total), because the S&P managed to close above the highs of the last two previous RDDs on Tuesday and Wednesday respectively. On a weekly basis of course, the S&P has already offset three previous RDDs occcuring in October, leaving only the one on Oct 6 not yet offset. In addition, both the S&P and the NASDAQ closed above their respective 200-day moving averages at least twice already (in fact, THREE times already). This is confirming action that signifies a bullish turnaround. The S&P has managed to exhibit remarkably bullish behaviour after a downturn of its monthly chart on trade below 1099 last week, and has captured the pivotal 1123 level with both conviction and volume. The NASDAQ has also staged a bullish 1-2-3 power-surge pattern --- this was something it did in October last year, and which subsequently lead to a huge rally to a high of 2150. All this price action is very positive for the market.
Seasonally we are entering a very strong period since November and December are typically bullish months. The market might yet reward bulls who are anticipating a post-election rally.
For now however, there is one barrier that stands in our way, and that is sentiment. Sentiment is way too bullish, as measured by the Intelligent Investor's weekly survey as well as the put/call ratio. The 10-day moving average of the CBOE put/call ratio has started to fall rapidly and is approaching a level that tends to signify market tops rather than market bottoms. This excessive bullish sentiment tends to suggest to us that rallies from here might be difficult.
The intermediate-term indicators are still heading down and are not expected to become oversold until at least a week after the election. The short-term indicators are now rapidly heading to overbought after the strong rally this week, and are expected to become overbought on election day, Nov 2. The number of new 52-week highs on the NYSE have also declined significantly in the past two trading days despite the market tagging on marginal gains. This is bearish divergence. On the NASDAQ, the number of new 52-week highs have yet to surpass that recorded in early October although the NASDAQ has made a higher high since then --- another bearish divergence. This suggests that the current oversold rally will fail.
STRATEGY: While this oversold rally may go on far longer than most folks anticipate, the prudent course of action now is to take partial profits on long positions. It is also too risky to be short the market given the extremely bullish market action displayed this week. If the market correct and causes both the short-term and intermediate-term indicators to become oversold, then a good buy opportunity might be in the offing. It would be even better if sentiment got decidedly more bearish; otherwise the next intermediate-term rally might again be a faltering one that leaves more opportunity to get out than to get in. For now, my only certain reading on the market is that over the next few weeks, the market will continue doing what everyone least expects. Perhaps we can use ourselves and our trading friends as contrarian indicators, as we always have been all this while!
dated 31 Oct 2004
The S&P staged a Real Accumulation Day on both Tuesday and Wednesday, and the NASDAQ followed suit on Wednesday. The S&P successfully defended the critical 1094-1104 support zone, and sailed through almost all conceivable resistance to close the week at 1130. The price 1130 should theoretically be the final resistance that stands in the way of the S&P challenging its yearly high in the 1157-1163 zone. But whether the S&P indeed challenges its 2004 high, is again, another issue.
Let us first examine the positives in the market now. The S&P staged back-to-back Real Accumulation Days, something it only did so during the Oct 2002 and the March 2003 lows, ever since the 2000 peak. As you might well recall, both the Oct 2002 and March 2003 lows led subsequently to significant rallies. In addition, the S&P carved out an outside up week and left a Suping Buy Signal on the weekly chart. Not only did the outside up week completely engulf last week's action, but it also completely engulfed the previous week's action --- making the engulfing candlestick on the weekly chart large enough to engulf two week's market action.
The powerful reversal by the S&P started when the S&P rebounded off 1089/1090 on Oct 26. Interestingly, 1089 is opposition 1157, the latter being the weekly closing high this year for the S&P. In addition, the date Oct 26 is square 1163, the latter being the intraday high this year for the S&P. Folks, we are seeing a price-time square-out at this very moment. The market is talking and we should listen!
The two RADs issued by the S&P completely offset two previous Real Distribution Days issued in October (there were 4 in total), because the S&P managed to close above the highs of the last two previous RDDs on Tuesday and Wednesday respectively. On a weekly basis of course, the S&P has already offset three previous RDDs occcuring in October, leaving only the one on Oct 6 not yet offset. In addition, both the S&P and the NASDAQ closed above their respective 200-day moving averages at least twice already (in fact, THREE times already). This is confirming action that signifies a bullish turnaround. The S&P has managed to exhibit remarkably bullish behaviour after a downturn of its monthly chart on trade below 1099 last week, and has captured the pivotal 1123 level with both conviction and volume. The NASDAQ has also staged a bullish 1-2-3 power-surge pattern --- this was something it did in October last year, and which subsequently lead to a huge rally to a high of 2150. All this price action is very positive for the market.
Seasonally we are entering a very strong period since November and December are typically bullish months. The market might yet reward bulls who are anticipating a post-election rally.
For now however, there is one barrier that stands in our way, and that is sentiment. Sentiment is way too bullish, as measured by the Intelligent Investor's weekly survey as well as the put/call ratio. The 10-day moving average of the CBOE put/call ratio has started to fall rapidly and is approaching a level that tends to signify market tops rather than market bottoms. This excessive bullish sentiment tends to suggest to us that rallies from here might be difficult.
The intermediate-term indicators are still heading down and are not expected to become oversold until at least a week after the election. The short-term indicators are now rapidly heading to overbought after the strong rally this week, and are expected to become overbought on election day, Nov 2. The number of new 52-week highs on the NYSE have also declined significantly in the past two trading days despite the market tagging on marginal gains. This is bearish divergence. On the NASDAQ, the number of new 52-week highs have yet to surpass that recorded in early October although the NASDAQ has made a higher high since then --- another bearish divergence. This suggests that the current oversold rally will fail.
STRATEGY: While this oversold rally may go on far longer than most folks anticipate, the prudent course of action now is to take partial profits on long positions. It is also too risky to be short the market given the extremely bullish market action displayed this week. If the market correct and causes both the short-term and intermediate-term indicators to become oversold, then a good buy opportunity might be in the offing. It would be even better if sentiment got decidedly more bearish; otherwise the next intermediate-term rally might again be a faltering one that leaves more opportunity to get out than to get in. For now, my only certain reading on the market is that over the next few weeks, the market will continue doing what everyone least expects. Perhaps we can use ourselves and our trading friends as contrarian indicators, as we always have been all this while!
