The structure that has dominated the price
pattern for nearly three years is a rising trend channel, which I have drawn on
the S&P 500 chart below. As you can see, the price index has once more
encountered the top of that channel, and that resistance will probably prevent
any significant price advance until overbought conditions have been allowed to
correct.
That is not to say that a major price reversal is imminent. It is certainly
possible, but it is also possible that prices will dribble along the bottom of
the overhead trend line for several months as happened prior to the summer price
lows.
There are two things that argue for a major price decline. First, is the
seasonal weakness that the market traditionally experiences in October, and the
other is the 4-Year Cycle lows, also expected in October.
On the other hand, investor sentiment continues to remain at strongly bearish
levels. Note on the Rydex Cash Flow Ratio chart below that the bears have
scarcely budged from the bearish side of the three-year range, in spite of the
fact that prices have moved steadily higher.
Bottom Line: It seems reasonable to expect some weakness over the next
several weeks, but I will remain bullish until our mechanical model says
otherwise. Even though cyclical and seasonal pressures present problems, I think
that sentiment is the trump card. It is hard for me to imagine a major decline
beginning when there are so many bears out there.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your
tactics if conditions change.
*RYDEX CASH FLOW RATIO: The Rydex Cash Flow Ratio gives an improved view of
sentiment extremes by using cumulative cash flow (CCFL) into Rydex mutual funds
rather than using the totals of assets in those funds (which we use for the
Rydex Asset Ratio). It is calculated by dividing Money Market plus Bear Funds
CCFL by Bull Funds plus Sector Funds CCFL.
Carl Swenlin is a self-taught technical analyst, who has been
involved in market analysis since 1981. A pioneer in the creation of online
technical resources, he is president and founder of
DecisionPoint.com, a premier
technical analysis website specializing in stock market indicators, charting,
and focused research reports. Mr. Swenlin is a member of the
Market Technicians Association.
