Oct 27, 2010

Time For Markets To Take a Break?

Current market rally stand to be really strong. However markets direction is not north only and investors should looking for signs when market will take corrective breath.
Many parallels can be found between current bullish market move and the one from beginning of the year (from February till mid May). Previous rally started before earnings season, as this did, previous rally was strong, almost 20% gain for S&P500 from through to peak, current gain is 12.3%. As seen on the chart, technical indicators are showing similarities as well. Relative strength index is gravitating around 70, moving averages of the MACD indicator are crossed at higher value and the histogram is fading before turning negative. The clearest signal is market breadth measured by % of companies above 50-day moving average. Current value is showing 85% of the companies in the broad index S&P500 over its 50-day MA. Values above +1SD (standard deviation), which is 85, are signal for overbought market. Another interesting similarity is crossing between % of companies above 50-day MA and the index (lower chart). Fortunately this is prior corrective signal. One month after it occurred market dropped. On the other side is very strong bullish signal called the golden cross – 50-day MA crossing 200 day MA from downside and both rising. This is expected to give markets another positive wave but still they are overbought. If markets grow further then the fall will be bigger as it happened previous time with correction lasting two months from May to July. However fundamental situation now is different and scenario like this is less likely.
Charts source: stockcharts.com, indexindicators.com

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