The market has finally broken out to the upside -- overcoming
resistance levels, the 50-day moving average, and breaking the existing
downtrend line. This is very positive action on the charts of the major
indices. There is modest resistance near Thursday's closing levels, but
from our point of view, it looks like a challenge of the yearly highs
will take place. This has been a difficult market to predict, in that the
technical indicators have wavered back and forth while prices ignored
support and resistance levels, to a great extent. However, this week,
with the equity-only put-call ratios finally generating buy signals -- an
event that coincided with the actual bottom -- action has taken on a
distinctly bullish tone. We are inclined to think that prices are going
higher.
All of our technical indicators are in agreement with this bullish
move -- the first time all have been in agreement on the bullish side
since late January. The equity-only put-call ratios had toyed with buy
signals a couple of times, but in past weeks always made new highs.
This time, however, they have snapped downward -- a clear and
significant buy signal from both the standard (Figure 2) and weighted
(Figure 3) ratios. Since these signals came from so high on their
respective charts, we think they will be significant ones.
Market breadth hasn't been as reliable. While there were timely
sell signals recently, these indicators never got oversold enough in the
most recent decline to generate buy signals. Nevertheless, they are
now quite overbought -- something that is actually desirable at the
beginning of a new bullish breakout. Ideally, they will remain bullish
for some time as the rally unfolds.
Finally, volatility ($VIX) has collapsed to its lowest prices in
over a month. This is bullish, in that the recently-established uptrend
in volatility seems to have been broken. While we expect the market
to be volatile, and therefore don't expect to see $VIX back at the 11
level soon, we still regard these lower levels as bullish.
So, the bottom line is that all of our indicators are in bullish
agreement. Usually, there is a good rally when that is the case. One
might think that it's too late to buy -- that four days of fairly strong
rally have already unfolded. But if you look at the action from last
October-November (Figure 1), you will see that that rally kept up the
pace for quite some time. There was plenty of room left after the first
few days had passed.
