I am hearing loud assertions from both extremes
-- that we have entered a bear market, and the opposing view, that we have begun
another major bull market up leg. In my opinion, neither view is correct;
however, the bulls are still clearly in control.
Looking at our first chart we can see that the S&P 500 has decisively broken up
through the top of the declining trend channel that has defined the recent
correction. Equally important, key timing model components are on the verge of
generating a new buy signal. Specifically, the PMO (Price Momentum Oscillator)
has recently crossed up through its green moving average line, and the Percent
Buy Index (PBI) is about to do the same. Once the buy signal is generated, my
market posture for stocks would change from neutral to bullish.
(Editor's Note: Complete descriptions of the Thrust/Trend timing model and its
components are available on the DecisionPoint.com website in the Glossary
section.)
Another positive factor is that the S&P 500 has remained inside the rising trend
channel that has dominated the pattern for about 30 months (see the second chart
below). The price index will have to drop down through the bottom of this
channel before we can claim that a bear market is in progress.
As for the "major bull market up leg" theory, there is no evidence that the
current rally is destined to do any better than the other rallies in the
2004-2006 time frame, all of which were contained by the top of the rising trend
channel. Not that it can't happen, but the recent correction did not create the
kind of deeply oversold conditions that usually precede major bull market up
legs.
Our second chart is a monthly bar chart of the S&P 500. It offers some small
hope to the bears in that the monthly PMO has topped and has been falling for
two months. This sign of long-term internal weakness is by no means conclusive,
but it does raise some doubt as to whether the rally can be sustained.
Bottom Line: Medium-term oversold conditions and extreme bearish
sentiment have turned the market upward before any serious technical damage was
done by the correction. Our market posture remains neutral (as of Thursday's
close) but our primary timing model is close to generating a buy signal. At this
point my assumption is that the rally will continue, but that it only has modest
potential.
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.
