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.