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Big Rally Nears Target Zone

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Looking at the chart above, we can see that today was pretty impressive. We moved above the 200-day moving average and approached the bottom of our price target zone (the pink box) for the S&P 500.

The MACD indicator is above the zero line and widening plus the Relative Strength Index is above 50 but not overbought.

The only negative about this rally is the rather light volume – but that is to be expected given that its August and most of Wall Street is in the Hamptons or on The Vineyard. Those that are paying attention to the market are focused on Friday’s employment report – which is anticipated to be better by 100,000 jobs.

Today’s rally was kicked off by better than anticipated PMI manufacturing numbers out of China. Our own PMI came in slightly better than expected, but still less than the previous month.

I’m looking for a move into the 1130 to 1150 area as detailed by the pink box we’ve been watching for several weeks now. Several good technical things happen if we move into that area – we will have broken the series of lower highs and lower lows that the market has been printing since the April high. That will be key for many under-invested money managers to move money into the market or fear that they will be left behind.

Remember, the technicals of the market are simply ways to understand the psychology of its investors. They also give you clues to know what money mangers tend to do based upon various patterns. If the typical reaction of a money manager that sees a break in a patter of lower highs and lower lows is to commit money to the market, then when we see the pattern we try to factor that into our investment work.

So we are watching for a move into the new target zone. That will give us a break of the pattern of lower highs and lower lows. If we get bad news on Friday’s jobs report, the break of the pattern can act as a cushion for any bad news as money mangers view it as a buying opportunity. If that’s the case, we’ll be watching for a potential move to the 1175 area, or the market peak in mid-May.

So, lots of variables out there. No need to be a hero and make a rash move – just watch what the market tells you in conjunction with the fundamental data – and you’ll make the right decision.

Mark