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Very Bullish Indicator
by Carl Swenlin
August 7, 2009
Last week's article was titled Hoping for a Pullback because plenty of people did not catch the beginning of the current rally. The problem with being in the position of hoping for the market to give us a break is that the market doesn't usually fulfill our hopes. This appears to be one of those times. Instead of showing any inclination to correct recent gains, the market is instead trying to break up through the top of the ascending wedge formation, which is the dominant feature on the daily S&P 500 chart. If the breakout is successful, it would be most unusual (and bullish) because the ascending wedge usually resolves to the downside.
Also last week, I expressed some concern regarding how overbought many of our medium-term indicators had become; however, in a bull market this is not a serious issue because bull markets often to correct internally while prices move higher. As the market moved higher this week, my partner (and daughter), Erin, pointed out that the SPX ITBM (Intermediate-Term Breadth Momentum Oscillator) might be making new record highs. As a result, I looked at the long-term chart below and realized that the ITBM was at its highest level in the 10 years we have been collecting data for the indicator. More important, I could see that the last time the ITBM reached these levels was when a new bull market was launching off the 2003 price lows. As you can see, there is a great deal of similarity between the two events. In 2002-2003 the market made a triple bottom over a period of about nine months. In the last nine months the market has completed a reverse head and shoulders, and has broken decisively above the neckline.
Are we getting confirmation from other indicators? Yes, the charts are pretty much unanimous. Another example is the Percentage of Stocks Above Their 200-EMAs, a price-based indicator. You can see below that there is a strong surge similar to that on the breadth-based ITBM chart.
Bottom Line: The very high reading of the ITBM, along with the recent price breakout, presents strong evidence that an initial impulse capable of launching another major up leg has taken place. And the similarity between the present and the 2002-2003 bottom, leads me to believe that it is more likely that we are at the beginning of a bull market rather than at the end of one.
Whenever I make bullish comments, and this is as bullish as I have been since the March lows, I get mail asking me how I can be bullish in the face of the dismal fundamentals we are facing. The answer is that I let the charts tell their story and pretty much ignore the fundamentals. If I had to guess why prices are bucking the fundamentals, it is probably nothing more complicated than prices reacting to the huge amount of liquidity that has been (and will be) dumped into the economy.
Do I think that this bull market will be similar to the last one in length and amplitude? Technically speaking, I think the potential is there, but I don't want to say that is my forecast. My next target is 1200 on the S&P 500.
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MECHANICAL MODELS
We rely on our mechanical trend models to determine our market posture. Below is a recent snapshot of our primary trend-following timing model status for the major indexes and sectors we track. Note that we have included the nine Rydex Equal Weight ETF versions of the S&P Spider Sectors. This may seem redundant, but the equal weighted indexes most often do not perform the same as their cap-weighted counterparts, and they provide a way to diversify exposure.
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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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