By Carl Swenlin
(This is an excerpt from July 8, 2011 issue of the blog for Decision Point subscribers – click here to subscribe.)
Dealing with daily blogs tends to narrow our focus to the short-term and to the activity on the daily bar chart. Even if a person trades in the short-term, it is always beneficial to keep an eye on the longer-term, which is where we can see the dominant forces that are affecting all subordinate time frames.
In the last five trading days our mechanical models have generated a large number of buy signals on the major market and sector indexes we track. Also, our short-term indicators registered extremely high overbought readings, which we have interpreted as an initiation climax — an internal indication that a new rally has been initiated.
The new buy signals are still vulnerable to short-term price declines, but we are still in a bull market, so we anticipate bullish outcomes until we see evidence to the contrary. Let’s take a look at the weekly bar chart of the S&P 500 Index. One positive sign is the rising trend line drawn from the 2009 low, and that support held during the recent correction. Another positive is the fact that the PMO (Price Momentum Oscillator) is rising as a result of the recent rally.
The negatives are that volume has been contracting since 2008, and there is a line drawn across the 2010 and 2011 tops that forms a rising wedge pattern — a pattern that most often resolves downward. The top of the wedge may mark the limit of the rally (about 1400), but the internals may be strong enough to take pries to the top of the rising trend channel over the next few months. That would give us a target of about 1550, which is near the all-time highs.
Looking at the monthly bar chart below reveals a 10-year trading range with some serious long-term resistance around 1550. Many believe, I among them, that this trading range will persist for at least another 10 years.
Bottom Line: The current rally has had a strong internal initiation, strong enough to potentially rise about 300 points off the June low, unless it runs out of steam at the top of the wedge pattern around 1400. Assuming the best case, I think that 1550 will prove to be the limit of the rally, and probably the bull market.
Read more from Carl on his Decision Point blog.