The market surged over the important 40-week exponential moving average last week, which is unequivocally a bullish development. This is the line that has held back all counter-rallies throughout the bear market.
So the question is getting vastly more interesting. Have we cycled into a bull phase?
The quick answer is sentiment still isn't behaving as it should for a true bull phase. While we're seeing some traders sell the rallies, we haven't seen the wholesale shift in sentiment towards lingering and continuing fear that we need to see for a sustained move. We just aren't seeing the sentiment patterns now that show up in lasting bull phases.
What we have now is more an absence of selling pressure than anything else. Nothing has come along to spark sellers into action. In such a benign environment, it's been the bears turn to be squeezed, and they've been squeezed for nearly all their worth. Our sentiment tank has drained almost to the bottom. At such a point, we all need to see how the market reacts to that tank filling up before we get too carried away about the return of the bull.
Interesting side-note: Barron's had an aggressive looking Bull on the cover this weekend, with a timid Bear fading into the background. The accompanying article had an array of bullish comments from money managers with a vested interest in a bull market. A wise trading guru just told me recently that you always need to have your guard up when you see such an obvious play by Barron's. The smart money likes to fade these Barron's covers.
There's also another chart I was noodling around with this weekend, that I thought I'd throw up for your perusal. I put a "mirror-image foldback" precisely at the low on March 13th. I did this because I wanted to ascertain where the fast move in the market was occurring. That is, was the down move quicker than the up move? Generally, the quicker, more chaotic, streaky move tells you the direction of the overall major trend. The slower, more congested moves are correcting and retracing these more important quick moves.
I also ran some "price/time" lines from the major turning points. This is a pretty cool tool adapted from the work of legendary trader W.D. Gann that measures trends in the context of price and time. So it's not just looking just at how far a move went, but how quickly it got the job done. Again, I wanted to know this to see if the market truly is sketching out a quicker up move than the recent scorching down move.
As you can see, the results from this noodling are pretty interesting. The market is tracing out an almost exact mirror-image of the previous quick decline. So far, it's right on the pace set by that downtrend, and just coming up to the price zone where the down move started. The critical test is right now.
So after all the down and up, the year 2003 so far has ended up a push. The S&P 500 has traveled many miles to end up right back where it was. Yet all this gyrating has galvanized a bullish majority.
If you trade off sentiment, as I do, then this can only be characterized as a high-risk environment for long positions. It's been high risk for the last few weeks, as I've been outlining. But again, this doesn't stop the market from going higher. The "easy points" off this uptrend -- those with the lowest risk -- were gained back around SPX 820 to 870 or so, when the momentum of sentiment was charging down from the +40 reading on the VIX. Back then, I unequivocally suggested a "stop-and-reverse" play if you were bearish and short to get long right around 820. That obviously worked out very well -- and that was the precise opposite set-up to what is happening now. Not many wanted to be long back then, which was just a few months ago. How quickly sentiment can change.
So I continue to believe this market is setting up to get whacked. The context of the next down move may have shifted, and we may indeed be in for a period where we stay comfortably above the recent lows. But there's always a great chance the bear can come roaring back when nobody expects it.
Economic growth is tepid, at best. Adam Oliensis has been chronicling this brilliantly in the "Closing Bell". The Weekly Leading Index from the Economic Cycle Research Institute is showing that economic growth is right around the "zero" line. The WLI has been an invaluable tool in predicting business cycle recessions and booms, and right now it's not signaling a boom is coming -- even with the strong stock market.
And there's always this forecast to keep us on our toes:
This is Professor Didier Sornette's prediction for the path of the "anti-bubble regime" on the S&P 500. This prediction has been calling for a seemingly benign sideways to up move that can last until the middle of this year, to be followed by a harrowing and swift tumble to new lows. He's demonstrated how this pattern recurs time and time again on the backslope of bubble markets. (Note: I'm in the process of setting up a recorded interview with Dr. Sornette -- because I want more details too! Look for this in the next few weeks.)
So if you key off sentiment, then it's still a bear market until the patterns change. We'll continue to look for our short set-up, according to our same sentiment timing models that have worked so well throughout the bear market. It's just requiring more patience this time.
But I'm content to wait for the real "spark of fear", and after that market drama plays out we'll see how many bulls are left standing.
One final note: we may have a mirror-image "stop and reverse" trade to the one I mentioned above developing to the upside. If the SPX can take out the quarterly high at 935, this could be a low-risk strategy. On such a breakout, it may make sense to join the mania for a quick pop up to the neckline at SPX 950 to 965. But the absolute key here -- as it was back at the lows in March -- will be to quickly stop-and-reverse on a move back down through 935. You'll want to get short on that move from above to below. This way the risk of the long position will be very small. I'll go over this in more detail tomorrow if we can implement this strategy. I wouldn't chase above 935 today, if the breakout attempt comes this morning.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tankdrained by 4 points to 5.5% full of negative sentiment on Friday.
SHOR-TERM: After flirting with starting a bona fide decline phase on Thursday the hourly gauge has regressed back into the neutral range in which it has lived since about April 23. Now, though, we're seeing a bullish divergence in the relative momentums of price and sentiment as price has gone UP while sentiment has hung flat.
MID-TERM: The mid-term gaugeprogressed fractionally in its developing decline phase, remaining essentially unchanged at 3%. Our Confidence diffusion Index regressed across the ZERO line to a BULLISH "-1." There is a tug away from the developing sell signal.
LONG-TERM: The weekly gauge progressed 8 points to 89% in its advance phase last week. However our weekly CDI has regressed to a bullish ONE. It hasn't moved out of phase, as the daily CDI has, but it's moving in the wrong direction.
BOTTOM LINE: We took on a little healthy fear (fuel) for a minute last week, and then burned it off as the market broke above minor resistance levels. This leaves the tank dangerously low as we bang into major resistance. If we are headed into a genuine bull market then the tank will remain at extremely low levels for a protracted period and our mid-term gauge will flicker around at the top of the dial. In that case the dashboard will begin to recalibrate itself as it adjusts to the market's new behavioral properties. (It normalizes itself according to recent behavior automatically.) If, on the other hand, the market is going to back off from major resistance, then we'll get a solid mid-term sell signal shortly.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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