The bigger picture

Here are a couple of daily charts courtesy of StockCharts.com. The upper chart shows the cash S&P 500 for the last two years. The lower chart shows the 5 day moving average of the CBOE equity put-call ratio (red line) and its daily readings (black dots).

On the S&P chart you can see that the average has rallied close to the 1200 level. I think this level will prove to be at least temporary resistance. It was the low point in July 2008 following the collapse of Fannie Mae and Freddie Mac. It is also at the trend line (green dots) drawn through the last two important highs. Now take a look at the chart of the put-call ratio. You can see that the 5 day moving average has dropped to its lowest level in more than a year. This suggests a level of short term bullishness that will have to be corrected before the market can rally further.

For these reasons I think a drop of 20-30 points is likely to develop soon. It may prove to be bigger but even then I think the market will hold above its January top of 1148.

Looking further ahead I think the S&P 500 will manage to rally into the 1230-50 zone (green oval) over the next month or two. That zone marks the confluence of the upper green dash channel line, the low point in March of 2008 following the collapse of Bear Stearns, and the top of the second box of 287 points for this bull market (blue rectangles).