Saturday, June 2, 2012

"Easy short" of SPX probably finished, let's look ahead: technical market strength

While I've been saying that KI$$ (Keep It $imple $wings) should be in cash or defensive, I'm sure many have chosen to go a step more aggressive and trade the stock market short. Worked great through yesterday, but what's next? Two of my favorite indicators show that profits should be taken on at least partial short positions and tighten stops - or start looking for a pattern reversal to go long. First, the bullish percent chart for the S&P 500 index ($BPSPX, first chart below). While the actual percent of SPX stocks with bullish point-&-figure charts hasn't reversed upward yet, the StochRSI in this chart's upper window has lifted. That's the sign that the bullish percent is very close to coming up again. Historically it's a pretty good indicator of a trend reversal. More often than not, soon after the StochRSI lifts, the market's about to bottom.

But note this - for KI$$ swings, the conscientious approach is to wait until the StochRSI moves to its upper level. The safest KI$$ swings occur when the StochRSI is either solidly up, ow down - not when it's wandering about in the mid-ranges. Here's the chart below (then after it, we'll look at the McClellan Oscillator):

The $NYMO chart showing the McClellan Oscillator for the NYSE index. I include the summation index too, and add trendlines although it's been awhile since I updated them! Look at how the oscillator bounced up after a reverse symmetrical triangle (also called an expanding triangle). On its subsequent drop it remains quite high, especially compared to stock index prices! While it's below zero, the positive divergence is startling. And its StochRSI indicator in the upper window is backtesting its own midline - a clue the oscillator has a good probability of moving higher, taking the stock market with it.

It's true the summation index is still low, so that's still concerning. But it's decelerating and looks ready to start a curl upward again. Even if it just tests its own midline, that'll support a rally, whether or not we see new highs in the markets. So all in all, the point is that traders and investors can look for the market to start finding support and start making a new effort to pattern reverse. A reversal pattern means starting to make higher highs and higher lows. At least for now, these technical indicators say that the market is ready to start working on a bottoming & reversing process.

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