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What A Month

S&P 500 Index Annotated

As bad as the September quarter was, October has been a barn burner. As I review accounts, the equity portion of our fully diversified accounts are up on average 17% for the month – with domestic equities up 20%, foreign equities up 16%, and alternatives up 16% – a pretty sweet change from September!

There are some important things I want you to see happening in the market right now, and I’ve annotated them on the graph above. But first, I want to point out that the Triple Bottom Reversal post in the previous blog entry showed we should see a move to the 1290 area on the S&P. We closed at 1285 today (and we have more than met the Rule of Three), which is close enough for me to say that the pattern successfully repeated itself – something I like to see as it helps confirm the usefulness of the sort of technical analysis I use.

In the green box near the top of the graph, I’ve shown you a histogram depicting the numbers of stocks that are trading above their 50-day and 200-day moving averages. When I first started including this, I mentioned that the change in character showed that the market was healing and getting stronger. You can now clearly see that the steady increase in both, giving us a strong change in trend.

In the pink circle in the main part of the graph, you can see that we have moved above the blue 200 day moving average line on the index. This is a critical juncture for the health of the market – you can see that the small candlestick that represents today’s market action dipped down to toward the 200-day line, but didn’t fall below it. Again, our Rule of Three is in place – for this to be a successful move above the 200-day line, it has to close above it for three days or for 3%. We will see what next week brings.

There are two more important positives you should see: (1) Note the red arrow above gray volume bar is strongly above the blue moving average line indicating that there was significant participation in the rally as it picked up steam; and (2) Look at the teal circle at the bottom of the page and you will see that we have a strong intermediate term up-trend indicated by the moving average convergence-divergence indicator.

In terms of negatives, this move has gone up so fast and so strong, we are now near-term overbought which will need to be corrected before we move significantly higher. The Relative Strength Indicator (see the orange circle near the top) and the Full Stochastics Indicator (see the orange elipse near the bottom) are both above the top indicator line.

As I’ve written in the past, these types of overbought situations can correct themselves with time passing or with prices going down. Obviously, we are hoping for time passing and the market to hold above the 200-day line and for this rally to have some legs. However, if I was to guess, based upon the years I’ve watched the market, I’d say we will retrace down to the 1250 or 1260 level and make another swing at moving above the 200-day line.

I also want to point out the purple arrow next to the horizontal volume bars. This represents significant overhead resistance near the August highs and will be an impediment for the market to move to that level – not impossible, but there we need to be some strong fundamental reason for it to do so.