Sunday, July 26, 2009

S&P 500 Rally Up

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We had another week of strong rally up. The stock market already show short-term overbought levels last week. Still, the S&P 500, DJI and Nasdaq 100 indexes rallied up without any correction serious short-term correction down… It is not healthy when market goes up for a long time without any correctional movement.

The Dow Jones Industrials just passed its November-December 2008 highs. The S&P 500 index ran over those levels without stopping and is a few points below its November 4, 2008 high. The Nasdaq 100 index, not loaded by financial and automotive companies, run over all these sensitive levels and the next line for this index goes through March 2008 Lows – March 2007 Lows – April 2006 Highs – January 2006 Highs.

Yes, if we take a look at longer-term charts (7-year chart, 5-year chart, 3-year and even 1-year chart), we may see that technical analysis on them is bullish. Majority of technical indicators on these longer term charts are positive and show development of the longer-term up-trend. However, if you take a look at shorter-term charts (60-day chart and lower) you may notice that the indexes on those charts are overbought and at least short-term correction would be very healthy for the stock market. One of the rules of technical analysis is: the longer market goes up without a correction the stronger correction could be.

During the last two week of rally up we saw increased volume activity which would indicate greedy buying. It looks like Investors were running into the market on the positive reports – numbers have exceeded the expectations that "were purposely lowered at the end of the last yea". When this wave of greedy investors becomes exhausted we may face a possibility of strong move down. As a rule greedy buying does not stop suddenly and market does not reverse down sharply (in opposite to reverse up from down-trend), but we may see sideway move first. Actually, over the last two trading sessions we may see some signs of that.

So, over the last week we run into several occurrences when price based technical indicators on hourly charts (60-day chart) already signalled a possibility of the down-move. Even Advance Decline Oscillator and McClellan Oscillator pointed to a possibility of the correction. Only SBV(20) on the 60-day chart remained positive by showing the positive money flow. Below you may see this week chart and how technical analysis looks by the end of the week.

SP 500

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