Saturday, January 16, 2010

Weekly Market Commentary: Sitting at Extremes

Markets are trading at momentum extremes with weak MACDs, similar to the situation for late spring/early summer 2007. Back then it wasn't until the end of 2007 that the first cracks appeared in the rally and in 2008 when things really hit the fan. So while the market is certainly hot at the moment, it may offer nothing more than a sharp reversal lasting a few weeks before the rally resumes - and new highs made.


For the S&P, the strong buy from April 3rd 2009 is still in play, with only a couple of weak profit-taking signals as shown by the orange arrows.


The Nasdaq 100 has only shown one weak profit-take signal and remains on course to test 1,978


However, the sentiment behind the weak profit-take signals favours the 'sell' side - eventhough markets have added another 10% since the switch


But the flip-side is the overly sensitive nature of market breadth and sentiment reversals. Many of the breadth indicators, like the Percentage of Nasdaq Stocks above the 50-day MA, gave very early 'sell' triggers - acting on them would have meant missing half of the rally - so a more prudent use may be to act on reversals of these indicators at bearish divergence resistance.


In this regard, the Nasdaq Summation Index has room to maneuver higher.


So it would appear this rally still has legs to run higher - even at these extremes. Any topping process will require a break and retest of highs. Given the strength of the advance, a topping process - when it comes - will likely take a while to evolve before the next true down leg can begin.

Personally, I am still looking for a trading range in 2010; one where the next major reaction low (one which has an down-leg lasting 1-3 months) will define support for the rest of the year. Whether it plays out is another matter.


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