The decline from the May top, and the subsequent sideways
chopping have been hard on investors' nerves as they try to decide how things
will eventually resolve; however, even though the rising trend line has been
challenged twice in the last few months, the technical picture has been steadily
improving. Also, sentiment indicators have been persistently and strongly
pessimistic -- some even worse than at the 2002 bear market lows -- and this is
bullish for the market.
The first chart shows the components of our Thrust/Trend Model, our primary
timing tool. (A full discussion of this model can be found in the Glossary
section of the DecisionPoint.com website.) The first thing we can see is the
bullish double bottom that was formed as the price index was challenging the
bottom of the rising trend channel. What remains to be seen is a decisive break
above the middle peak of the "W", but the price pattern is positive
nevertheless.
Until recently the model has been in neutral because the Percent Buy Index (PBI)
has been below its 32-EMA, but, as you can see, the PBI has also formed a double
bottom and has recently broken above its 32-EMA, switching the model to a buy
signal. Also, the PBI, like most of our other medium-term indicators, is rising
out of oversold conditions. The chart looks very positive.
The model shown is for the S&P 500 Index, which gives us our positioning for the
broad market, but we also apply the model to other market and sector indexes. As
you can see in the table below, buy signals are being generated across a wide
range of indexes and sectors.
Decision Point's Primary Timing Signals
August 3, 2006
This table is updated daily in the Decision Point Alert Daily Report.
No matter how positive things may look, there is always something to worry
about. For me it is that we are overdue for a bear market, and we are also due
for a price trough associated with the 4-Year Cycle. As you can see by the chart
below, the 4-Year Cycle is pretty reliable in attracting price lows, and based
on the history shown on the chart, there is about an 80% chance that prices will
be lower later this year (and about a 20% chance that they won't).
Also, it is not easy to see on the chart, but the monthly PMO has topped and has
been falling for three months.
Bottom Line: Actions taken by the Fed next week could torpedo my
conclusions, but the most objective evidence we have shows that the market is
configured for another advance, and this is backed up by the more subjective
pessimism reflected in most sentiment indicators. On the other hand, if the
models have been tricked by the market, they will normally turn neutral with
only minor loses; however, stops should be used to guard against negative price
action that is too rapid for the models' reaction time.
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.
