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Market Posture

January 14, 2007
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I’m going to do another Market Posture now that we’ve got a couple weeks under belt in 2007 and the opening jumpiness is behind us. As much as it scares me, I’d have to say that the market has turned to remain quite bullish. (This being scared to bet bullish is something I need to work out, psychologically.)

The horizontal and diagonal support lines for the SPX held up and we’re still in our channel from early Nov. Although the weekly close was just higher than the previous ones, we’re still essentially at resistance. But it’s certainly a big, strong bullish candle closing right at the top. On price action alone, which is of course king, since we’re nudged right up against resistance with a whole lot of bullish momentum behind us, we can only assume we’re more likely to move upward than downward. For the all clear, we’ll need a break above 1432 and then we’re officially back at a 6 year high. 1410 remains support just below us.
(Click image for larger view)

As a point of caution, let’s consider what the indicators are telling us on this weekly chart. MACD has just crossed into the red, which indicates waning momentum. Stochastics are inching a bit lower in the overbought zone. These are weekly indications, remember, so they’re a bit removed from what we can expect day to day. In any case, price is king and we must make the bulk of our decisions on trend and support and resistance, but it’s not a bad idea to consider what the these lagging indicators are telling us.
One other point of consideration is that we’re approximately 90 pts. above the 30 week MA. Looking back at the bull market since it began in ’03, I find only two other places where we were 90 points extended from this MA. Make of that what you will. I don’t think that necessarily means that we won’t push higher. It’s just to consider that we’re extended and a correction would be a healthy thing. From what it looks like now, perhaps we’ll have a “correction by time but not price,” as Peter Reznicek says. That means that the price consolidates sideways while the MA gradually works its way up to meet it for a “correction” of the distance between price and moving average.

The Daily chart shows us that the 20 MA has been increasingly challenged, but the 50 MA held strong and provided us with the bounce. The Market forecast shows the Intermediate line turned back up with room to rise, so the outlook there is bullish. Even the longer term Market Sentiment line ticked upward ever so slightly.

Not much to say about the VIX other than….WOW. Seems a ceiling is being strengthened above us here. That’s quite a serious red candle on this weekly chart indicating bullishness (as an inverse indicator).

As for the Nasdaq, HOLY COW! Is that a bull flag that just broke out? I’m not so sure that Flags are meant to be seen on such a large time frame, but if so, this would suggest a rise from the breakout point of about 450 pts.(The height of the Flag Pole). Notice that the index also decisively broke through the multi year channel resistance line in light blue once and for all.

The weekly indicators show essentially the same extended condition on the Nasdaq as the SPX. But I think the price action here is much stronger and trumps all, so I’ll forgo that part. Market Forecast looks roughly the same too.
For a target perhaps more reasonable to deal with than 450 pts up, we could look to the Fibonacci Retracement levels of the fall from the bubble burst down to the low in 2002. Notice how the rally responded around the first and less significant 23.6% retracement level. The 38.2% level would give us a target of 2,645, about 140 pts. higher than where we are now.

Oil is now in a serious down trend with room to go further which, at least in the short term, seems to breathe life into the market.

In summary, I’m finding little reason to be other than bullish. The Vix remains in the low zone. The Nasdaq is now at a strong 6 year high. The SPX has a potentially magnetic affect drawing toward 15,000. The Dow is at an all time closing high. Remember the very, very simple truth: New highs lead to more new highs.

The main bits of caution as I see them are this:
If oil falls apart further and brings all of the energy related stocks with it, that could take a toll on the SPX. Rotation out of oil into Tech. is probably a big part of what’s causing the Nasdaq to finally regain the leadership role.
The daily SPX chart with three green arrows is heading up in its recent channel with room to go. With a break above this minor resistance(a potentially nice buy point on the SPY), it should be able to shrug off the bearish divergence showing on the MACD.

The Nasdaq’s three green arrows and breakout above a period of healthy consolidation look very strong. But with 5 up days in a row, I wouldn’t be surprised to see a test of the 2,470 area in the near future to establish new support. A bounce off that level would be a great entry for bullish plays on the QQQQ.

It would be a very good idea to spend some time looking for strong Tech. stocks for your watchlist.

On that note, I’d like to put out an invitation for suggestions of stocks to add to our list. I’d like to rotate out some of the laggards. Take a look through the list and see which ones look like they should be fired. If you can come up with a replacement from the same or a similar industry group, leave the suggestion in the comments section below with
a bit of your reasoning why you like it. The only stipulation I ask is that you aim for optionable stocks trading around 1 million shares per day or more.

I’ll try to get a post up in the next few days with a look at the major sector indexes.

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