Wednesday, July 10, 2013

new bull market highs ahead

Here are three charts which offer some insight into the US stock market's current technical condition.

The top chart is a daily bar chart of the cash S&P 500 going back to 2011. I was expecting the reaction which began from the May 22, 2013 top to carry the S&P all the way down to 1510 or so (green oval and purple dash arrow). One reason for expecting this was the fact that the level of bearish sentiment at the June 24 low was not as high as I would expect when an important low is developing.

Nonetheless the S&P rallied sharply from that June 24 low and now has retraced all of the drop which followed the Fed policy announcement on June 19. This sort of complete retracement of a big, fast drop usually means that the market has bounced off of important support and is headed still higher. In this case my minimum upside target would call for a rally of about 200 points, the same size as the June-September 2012 rally. This would put the S&P at 1753 or so.There are other previous up legs visible on the S&P chart which would project a higher top but this bull market is getting long in the tooth ( 52 months and counting) so I think it would be a mistake to expect too much on the upside.

In the meantime I think support beneath the market stands near the midpoint of the rally from the June 24 low, currently about 1605. This level is also close to the April 18 top and the June 6 low (green line) and is support for those reasons too.

The bottom two charts show the 20 and the 10 day moving averages of the daily number of advancing issues on the NYSE. You can see that at the June 24 low the 20 day oscillator (middle chart) had reached or exceeded the oversold levels it established at all of the important low points during the past two years. The inference is that a correspondingly big up move has begun, one similar in size to the rallies which followed previous oversold conditions.

The bottom chart shows the 10 day oscillator. At the June 6 low it matched the oversold reading achieved at last November's low. At the June 24 low is showed a bullish divergence by not following the S&P by dropping below its June 6 low. At the time I did not think this divergence was significant, partly because there was no such divergence in the 5 day oscillator. In any case the subsequent rally has pushed this 10 day oscillator to a rally "kick-off" level which means that several more months of advance lie ahead.

This bull market has already lasted 52 months, an unusually long time. Of course the preceding 2002-2007 bull market lasted 60 months. I'd say that 60 months is about as much as one could hope for this time around too, especially since George Lindsay's  15 year time period from bear market low to bull market high expires this coming October if counted from the October 1998 low. Also ending in October is the basic advance, counted in calendar days, which began at the October 2011 low.

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