Thursday, November 14, 2013

one bearish divergence but still headed higher

Here are daily charts of my three favorite trend indicators, the Dow, the S&P 500, and the New York Stock Exchange advance-decline line.

You can see that all three are above both the rising 200 day moving average (red lines) and the rising 50 day moving average (green lines). This is the classic picture of an ongoing bull market.

But no tree grows to the sky and this bull market is already 56 months old - well past maturity for a typical bull market. It is approaching the length of the biggest two exceptions to this rule - the 1932-37 bull market which lasted 56 months and the 2002-07 bull market which lasted 60 months.

I would describe market sentiment as very bullish as measured, for example, by the Investor's Intelligence and the AAII surveys of market sentiment. The Time Magazine cover depicting a bull on Wall Street appeared in mid-September and its bearish implications are due to manifest themselves starting right about now.

On the bottom chart you will note that the advance-decline line made a top on October 28 and has yet to approach that top despite new highs in the Dow and the S&P. This is a clear bearish divergence in this indicator and a warning that the current rally is probably the last of this five year bull market.

But bearish divergences and excessive bullish sentiment will not by themselves kill this long-term up trend. Once the bullish crowd gets into a buying mood there is no telling when they will stop. So the best approach to take is to wait for some definite sign that sellers are taking hold of the market. At the very least this would require two of the three indicators above to drop below their 50 day moving averages.

In the mean time I expect to see higher prices in the weeks ahead. The 1900 level in the S&P is the point where the rally from the June 2013 low would match the size of the November 2012-May 2013 rally and is a logical stopping point for this one.

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