The rally, which is now about 6 weeks old, reached overhead
resistance this week (see Figure 1). This caused one of the sharper
pullbacks so far, but did not generate any sell signals from our
technical indicators. The market appears to be preparing another
upside assault on that overhead resistance. It would be very
constructive if the market could exceed the highs of this week. On the
other hand, if the major averages were to fall below their 20-day
moving averages, that would put a severe crimp in the bullish case and
might even lead to a sizeable decline, but only if other sell signals
accompanied such a breakdown.
The equity-only put-call ratios remain bullish. The are still
falling rather precipitously (Figures 2 and 3), which is positive. They
won't present any problem until they bottom and begin to turn upward,
and there is no sign of that at the current time.
Breadth has been quite positive on this move as well. It would take
a couple of days of bad breadth (at least) to generate sell signals from
breadth, so unless that occurs, these remain bullish as well.
Volatility indices ($VIX and $VXO) are once again attracting the
interest of novices and part-time volatility followers. That's because
they're so low. Both indices reached their lowest levels since January
of 1995 this week. As we all know, when volatility spikes upward,
that is a sell signal. However, it hasn't spiked upwards yet, and so this
indicator remains bullish as well. You might ask,"When would a sell
signal occur?" We generally feel that if $VIX closes more than 3
points above its lowest point, that's a sell signal. Last Monday, $VIX
traded at 13.16, so if it now closes above 16.16, then a sell signal will
have occurred. That doesn't appear to be imminent, either, since $VIX
is 14.39 now.
So the four areas of technicals that we follow all remain on buy
signals. Yes, it's possible that they could roll over to sell signals, but
we intend to remain bullish until they do. We would suggest that you
do not anticipate any sell signals (i.e., don't short this market before
sell signals occur). It's just possible that the market could surprise
everyone and blast on through the overhead resistance, trapping shorts
and extending this bullish run even longer.
