Wednesday, November 28, 2007

Uptrend Has Started

Here are four charts which I think have a lot to say about the trend in the stock market indexes.

The first chart is a weekly chart of the cash S&P 500. You can see that today's big rally has moved this week's price range outside the range of last week. If the average close in the upper half of this week's range on Friday I think we shall have an example of a bullish reversal bar.

There are three good reasons to think this bullish reversal bar will mark the start of a rally to new highs.

The first one is illustrated on the second chart above this post. This is a compressed weekly chart of the cash S&P 500. On it I have drawn the price boxes which have controlled the 5 year old bull market. These boxes are 185 points wide. (I last commented on this chart here. )Notice that the most recent drop has ended at the 1/2 division point of the current box and is nearly as big as the July-August drop. So the rally which started yesterday started from what should prove to be strong support in the 1395-1416 range.

The second reason is shown on the third and fourth charts above this post. These show the 5 and the 10 day moving averages (in purple and red respectively) of the daily count of the number of issues which advance each day on the New York Stock Exchange. (I last commented on this indicator here. ) The low early this week was accompanied by bullish divergences in both moving averages which failed to make new lows when the S&P did. A similar divergence shows in the daily count of advancing issues itself. Moreover, the daily count today is the highest in more than two months and this suggests that today is the kick-off day of a big rally.

Finally, sentiment is very bearish; the newspapers and magazines I read are filled with gloomy reports about the US dollar, the sub-prime crisis, the credit crunch, and the collapse in the housing market. If the averages can hold above their August lows as they appear to be doing in the face of such bearish news I think we can fairly conclude that they are headed much higher.

For these reasons I think the S&P 500 is on its way to new bull market highs. The top of the next box is near 1700 and I think the market can reach that level during the next 3 or four months.


Anonymous said...

Interesting post, Carl. Thank you, especially for the comments about your box theory. One thing I'd be curious hearing about is this: Do you have a theory as to WHY the market unfolds in these kinds of mathematically relationships, what makes the box boundaries act as support and resistance, or more broadly what makes the price go up to a trend line and bounce off (and all the other technical patterns we see in the markets)? How can it do that? Technicians all over the world know about this stuff, but how can it do that? It's all coming out of group thinking, group emotions, so I find it fascinating and mind-boggling that the market displays these often predictable patterns. They have to be somehow built in to the collective mind and heart that's doing the trading...

Another thing I'm curious about is the practical side here, i.e., the near term with respect to how you will enter the market. Seems unlikely that the market will drop to 1396 now. So I'm wondering whether you took a long position on the way up today or are waiting for a pullback. It's academic for me because I'm in, but there have been other times when I've been out, waiting for a low, but the market takes off without ever hitting my expected low and I'm left trying to figure out how to get in as the market is rising rapidly.

Thanks again for sharing your thoughts and theories with us.


Anonymous said...

So, do you not believe markets can ever go down on bad news? Seeing a break in selling does not necessarily mean a major new advance. I'm bullish on the dollar but I have to be a realist. All of these data points you cite as bearish are already down significantly in value and there have been negative headlines well before they started dropping. Companies are losing their arses on debt instruments you cite as supporting evidence, housing has fallen for the first time in recorded history on an annualized basis that you cite as supporting evidence and the credit crunch you cite as evidence is causing serious financial loss. So, if you would have used these metrics to make bets on these markets instead of the S&P, you'd be bankrupt as are those who have indeed done so.

That said, it is plausible that professionals will attempt to manipulate this market higher in order to draw in more sovereign fund money as they need weak hands to dump all of their manufactured trash to. And, the American consumer ain't buying.