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PREPARE TO ADVANCE! |
5 reasons why I'm looking for a
Nice Little Rally
Nice Little Rally
1. PRICE
The Dow Jones Industrials Avg has reversed from these levels on at least 12 occasions over the past five years.
A triple top formation on the S&P500 targeted 1382, which has now been achieved. The index has also closed below its 200-day moving average for the first time in several months, having just set a 3-year high. The short term portents from that simple set-up are decidedly positive (see chart), the '87 crash being the only fly in that ointment. Results are much more mixed longer term, however.
Source: MarketAnthropology.com
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This remarkable analog from Erik Swarts at Market Anthropology shows the Nasdaq 100 index tracking the hourly movements of the S&P500 as it formed its 2007 top. The chart is self-explanatory. Analogs always break down eventually, but when they're this good they can provide an amazing edge before they do.
2. SENTIMENT
The CBOE Total Put/Call Ratio ('Dumb Money') suggests sentiment has become bearish enough to support a short term rally.
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| Source: SentimenTrader.com |
The CBOE OEX Put/Call Ratio ('Smart Money') is at a level of bullishness which has led to a short term rally (at least) with great consistency.
3. MOMENTUM
Momentum as measured by a shorter term MACD is now entering the 'turnaround zone'. Caution is warranted though, with the longer-term indicator not yet offering encouragement.
4. BREADTH
While my weekly Nasdaq Net New Highs indicator is not yet at an extreme which would suggest a lasting low (http://scharts.co/TH02bg) the daily picture has become stretched enough to support a rally. Given its 'failure' last month I would however prefer to see a divergence between indicator and price action - which I suspect we may soon get, with a slightly lower low in $SPX and a higher low in Net New Highs.
5. RISK APPETITE
My weekly Risk Aversion Index warned of a correction in good time (http://scharts.co/X3X9as). Now, there are unambiguously bullish signs on the daily timeframe.
CONCLUSION
These, alongside a number of the other indicators I watch, suggest a consistent theme: short term probability of a decent rally, longer term likelihood of a continued correction. Powerful seasonal factors also come into play, especially surrounding the US election, and these are undoubtedly positive for stocks heading into next year.
For several reasons I am far from convinced we've seen a long term top, although the mental mists over that picture are yet to clear. So while they swirl I'll not make wild guesses but focus instead on a shorter term view where the outlook is considerably less murky.
