The market has moved up nicely from the lows of last winter in classic 'dead-cat-bounce' fashion. After registering a buy signal last May (13 week EMA cross back above 30 week SMA) the market was poised to take back some of the previous two year's horrendous losses. Two significant technically bullish targets on the SPY have been met (the 50% rule of the entire bear move and the very rare weekly chart gap; both near 108) and the market is (as suggested over the past few weeks) looking very tired. Since the moving averages are still positioned bullishly one must remain bullish and look for further price appreciation. Should we get a further push higher in equity prices over the coming weeks one ought to expect significant resistance to come in near the 120 area on SPY. That is less than 10% higher and I might suggest that this is the area investors should get cautious and not greedy. Once the current Obama euphoria is gone, I fully expect prices to test (and probably go through) the lows we saw last winter as this recession plays itself out...
But the market has not rolled over yet so lets consider where the market may move to in the short term. I believe 120 shall represent a line in the sand for the stock market because of three reasons. 1. The bear market trend line that started more than two years ago sits in this area (red line on chart), 2. The top of the recent up channel is in this area (blue line on chart) and 3. The 200 week SMA (now pointing downward!!) is in this area.
Fundamentally, the market is trading again at very lofty PE ratio levels suggesting earnings are not supporting this recent move higher in prices. The perception of 'panic' in the financial system has eased and further support for equities from public sources seems to be waning. 10,000 has been breached on the Dow and investors are feeling like everything is alright, sounds like its time (or nearly time) to start thinking short again....
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