Friday, February 06, 2009

Keep an eye on Percentage of Stocks above 200-day MA; shorts runs the risk of getting caught with their pants down

Breadth indicators remain a mix of the overbought (Summation Index), neutral (Bullish Percents and Percentage of Stocks above 50-day MA), and oversold (Percentage of Stocks Above 200-day MA). While intermediate-term pressures are best measured by the Summation index, long term conditions will likely be dictated by action at stock 200-day MAs.

There is a number of interesting factors at work. Plenty of traders are looking at November lows as a major bottom and have pushed a good percentage of stocks above their 50-day MAs based on the associated 'value buying'. However, the lack of follow through has left many traders nervous and this has reflected itself in the pennant pattern developing in this breadth indicator.

This uncertainty has to be taken in the context in a breakout in the number of stocks trading above their 200-day MAs; a much stronger bullish long term signal. Now things are still horribly depressed, but we may soon see fresh leadership enter the market which will spread to other stocks.

I would anticipate, based on 200-day stock action, that the pennant in the percentage of stocks above their 50-day MA will break upside; taking the bullish percents up with it. This will set up a more powerful intermediate term rally likely lasting into May. Beyond that things could get ugly quickly, but there is so much expectation this sideways trading pattern is going back to November lows (including myself in the expectation) that it may simply not get anywhere close. The resulting rally will trap many existing shorts looking for November lows with their pants down. Even the transports, which are back at November lows, are holding up reasonably well (Adam-and-Eve bottom).

Whatever about buying the market, the environment is not clearly one to be short in - unless day trading.

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts and stock charts website