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Hoping for a Pullback
by Carl Swenlin
July 31, 2009
Since the price lows of early-July, the market has moved relentlessly higher, penetrating the important resistance posed by the 200-EMA. When this rally began, a narrow window of fairly low-risk opportunity was presented. Those who missed it are now hoping that prices will pull back far enough to provide another good entry point.
The most obvious and promising pullback target would be a move down to the 200-EMA, but would such a move fuel confidence, or would it only serve to crank up the level of anxiety? As you can see, another ascending wedge has formed, and, if you have been following our commentary for a while, you know that an ascending wedge is a bearish formation with a high probability of a breakdown. If we do get a pullback, the next obvious fear will be that the pullback will not end, and that prices will break down from the wedge and continue on down to test the July lows.
Adding to the evidence supporting a possible breakdown are medium-term indicators, like those below, showing that the market is quite overbought, a condition that will need to be cleared. In bull market conditions, which I would ascribe to our current situation, it is possible for overbought conditions to be worked off even as prices move higher. That is to say that prices may not pull back at all, but simply break up and out of the wedge. To the other extreme, a healthy price decline can do the trick.
Bottom Line: For those who acted on our March 17 buy signal, contemplating the outcome of the ascending wedge and/or the possible pullback does not create much, if any, stress. But for those who are still out of the market and looking for a chance to participate in another up leg that has the potential to move prices up another 20%, the next few weeks will probably not be much fun.
One of these days, the market mood is going to switch back to bearish for an extended period, but, based upon price action to date, I must assume that the current setup will resolve in favor of the bulls, meaning that I don't think the wedge will be broken to the downside.
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Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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2008 TIMER DIGEST RANKINGS FOR DECISION POINT
#17 Intermediate-Term Stocks (52-Weeks) (TD Index 111.9 Vs. SPX 61.51)
#4 Bond Timer (*TD Index: 112.32 Vs. Bonds 118.26)
#5 Gold Timer (TD Index: 126.33 Vs. Gold 104.61)
#9 Long-Term Timer (2 Years) Stocks (TD Index: 132.35 Vs. SPX 63.69)
#2 Long-Term Timer (3 Years) Stocks (TD Index: 150.38 Vs. SPX 72.36)
#2 Long-Term Timer (5 Years) Stocks (TD Index: 168.82 Vs. SPX 81.23)
#3 Long-Term Timer (10 Years) Stocks (TD Index: 159.36 Vs. SPX 73.48)
2007 TIMER DIGEST RANKINGS FOR DECISION POINT
#40 Intermediate-Term Stocks (52-Weeks) (TD Index 91.9 Vs. SPX 103.28)
#5 Bond Timer (TD Index: 105.85 Bonds 104.39)
#2 (Tied) Long-Term Timer (2 Years) Stocks (TD Index: 117.63 Vs. SPX 117.63)
2006 TIMER DIGEST RANKINGS FOR DECISION POINT
#11 Intermediate-Term Stocks (52-Weeks) (TD Index 111.3 Vs. SPX 113.6)
#3 Bond Timer (TD Index: 112.32 Vs. Bonds 97.46)
2000 TIMER DIGEST GOLD TIMER of the YEAR
*All timers are assigned an Index of 100 at the beginning of the year. The amount above or below the starting index indicates the percentage gain or loss for the year.
Beginning in 2006 we began using mechanical models -- the Trend Model for Bonds, Gold, and Long-Term Stocks, and the Thrust/Trend Model for Intermediate-Term Stocks. Prior to 2006 we used discretionary signals.
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BIO: 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.
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