A Market Turn This Week Will Surprise Many

A Market Turn This Week Will Surprise Many

A technical look at the stock market after last Friday's close (Why Friday's Reversal Was Important) indicated that an important turn may have occurred. The strong performance on Monday, especially the 7-1 lead of advancing stocks over declining stocks further supports this view.

The action looks similar to that on October 4th, 2011 when the market dropped sharply in early trading but then closed the day higher. From the Oct. 4th lows the Spyder Trust (SPY) rallied 20% in just the next seventeen days as those on the short side were squeezed as just before these lows the bears were out in force.

The stock index futures are a bit lower ahead of the US market opening on October 6th even though the German Dax, CAC 40 and FTSE 100 were all slightly higher. Though many of the major averages closed near the daily starc+ bands the technical action suggests some early softness in prices may be met with afternoon buying.

A look at the market internals makes it clear that the next two days closing prices will be important.

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The NYSE closed at the daily starc+ band and a close above the September 17th high at 10,362 will certainly worry those on the short side.

- There is further resistance now at 10,700 (line a) and the 20 day EMA at 9970 is now trying to turn higher.
- After Friday's close I noted the bullish divergence (line d) in the NYSE A/D line as it did not make a new low last week even though the NYSE Composite had closed below the August low.
- The A/D line has not broken its downtrend from the July lows, line c, which is a positive sign. A move in the A/D line above the September highs would be bullish.
- The McClellan oscillator formed a strong positive divergence at the lows, line f.
- The Oscillator has now surpassed the resistance at line e, which confirms the divergence.

The Spyder Trust (SPY) gapped above the quarterly pivot at $195.06 with the daily starc+ band at $199.06.

- The downtrend on the daily chart, line g, is in the $205 area.
- The S&P 500 A/D line has turned up from support and moved above its WMA and teh initial downtrend, line i.
- There is more important resistance for the A/D line at line h.
- The OBV is acting weaker as it made lower lows last week (see arrow)
- The daily and weekly OBV are both now above their WMAs.
- There is minor support now in the $196.80-$197.40 area.

What to do? I will be looking for a shallow pullback this morning but if the A/D ratios are neutral or slightly positive will be looking for a entry point in some of the ETFs as they are likely the safest play going into earnings season.

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