The broader US stock market (as measured by the S&P 500 stock index) has enjoyed a nice rally off its lows of 2009. Indeed, since our 'investor' buy signal was registered last April 27th, at 86.50 (that being a bullish cross of the 13 week exponential moving average moving above the 30 week simple moving average) the market has rallied some 27% [(110.23 - 86.50)/86.5] in less than a year. Believe it or not, this is rather normal for post correction rallies. Think of the 50% rule and you will understand what is going on. Specifically, a 50% retracement of the entire two year bear slide would bring the market back to 112.31 [(157.52+67.1)/2]. Currently we are within 2 points of that number, incredible isn't it!!! It is interesting too, to see the significant resistance that has been built into the market at/near this important technical level. These include the major lows of the spring and summer of 2008 (115.68 and 120.31 respectively) and the 200 week SMA (117.82). So considering we have exceeded the 50% level at 112, filled in the noticeable gap at 107 and have now failed in a significant resistance zone (115.68 to 120.31) I think it is safe to say, the easy part of this market rally is behind us. Indeed, one can't help but get the feeling we are fast approaching an end to this 'bounce' period. Governments around the world seem less sympathetic to the market. Weather it be in the form of tougher regulations or in the form of higher borrowing costs going forward, the 'tone' seems to be subtly changing in this market commentators opinion.
Having said all that, one must not put the cart before the proverbial horse. As of printing, the market has NOT broken down (from an 'investor' perspective) and one must continue to look for higher prices over the course of the coming months. Should the 13 EMA cross back below the 30 SMA our 'investor' stance shall change but it hasn't so we remain cautiously bullish.
While this market indicator remains bullish we , as 'investors', must look at swift downward moves in the market as healthy corrections. Indeed, this current 3 week pullback comes on the heels of an 11 week rally. Simple cycle analysis suggests corrections are often half the duration of primary moves. So one ought to be looking for a 5.5 week consolidation before we can move forward in earnest. Or looking at it another way, we should be looking for this correction to continue for another 2.5 weeks. As for targets, the very noticable gap left on the chart at 106.82 ought to be filled. Our low last week went into the gap (107.22), but it did not fill it totally. As well, the 30 SMA currently sits just below 106 suggesting more support in and around that area.
So what does all this mean...
I remain cautiously bullish heading into the spring of 2010 while looking for another 2.5 weeks of consolidation in the short term. I think upside potential is limited but still there. And any rally ought to be considered a selling opportunity to take profits on stocks picked up last spring and summer not a new 'investor' buying opportunity. Yes, the 'traders' of the world will make money on the seasonal swing but this blog is more for the 'investors' of the world. 'Investors' should be long from the 86 area (on SPY specifically) and looking to take profits. Once the seasonal window closes (May-June) It is my prediction that we will be issued an 'investor' sell signal and see the market take back the 2010 gains and maybe even a good portion of those of 2009 as well.
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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