Wednesday, February 03, 2010
Over the years I have found that the best way to identify the reversal of a trend is to look for a break in the trend's rhythm of reactions. Reactions within an extended move up or down show a strong tendency to be of the same length when measured along the price dimension. Sometimes they also show a tendency to last about the same number of days. It is this tendency which is the basis of my box theory of market action ( which I think shares many features with Darvas' original idea).
From this point of view the bull market which began from the March 2009 low point in the S&P is still going strong. This is clearly evident in the first chart above this post. This line chart shows the daily cumulative total of the difference between advancing and declining issues traded on the New York Stock Exchange. Notice that over the past 11 months there have been three reactions within the up trend, each of about the same size, and each ending when the 50 day moving average was touched.
The top chart shows the daily trading ranges in the cash S&P 500, together with its 50 and 200 day moving averages. The recent drop from the 1150 high matched the average length of the two preceding big reactions. It also stopped just a shade above midpoint support (dotted purple line). The downside penetration of the 50 day moving average matched the size of a similar penetration last July.
All of these observations tell me that the rhythm of this 11 months up trend is still intact. The implication is that new highs for the bull market lie ahead. As you know I think the S&P will reach the 1200 level during the next three months.
What would it take to cast some doubt on the bull market trend?
On the top chart I have drawn a green dash line at the 1030 level, the last reaction low prior to the top. Should the S&P drop below that level and below the 200 day moving average (red line) I would have reason to worry about the continuation of the bull market trend. But I probably wouldn't give up on it unless and until the 200 day moving average itself were to turn lower.