The strong technical action Monday with over 3-1 positive A/D ratios further validates last week's positive action and the shallow nature of the recent pullback. Many of the longer term sentiment measures that I follow still have to change significantly before they signal that bullish sentiment is now too high.
The high level of bearish sentiment and heavy put buying at the February 11th low coincided with the bullish signals from the market internals (Is There Blood In The Streets Yet?) This created the perfect environment for a market bottom. In order for the market to move even higher the A/D lines need to continue to lead prices higher.
Traders are still quite skeptical of the recent market action and that is a positive sign. The Fast Monday panelists Monday were uniformly skeptical of the recent market rally as several were looking for a rally above 1950 in the S&P 500 but not much more.
Put/Call ratios Monday revealed that SPX put volume was 1.7 times the call volume and the VIX Put/Call ratio was almost 3.00. This is also a sign that traders are looking for the VIX to rally and for the stock market to move lower.
Buy what do the charts say?
The daily chart of the Spyder Trust (SPY) shows that on Monday it was able to move marginally above the early February high at $194.58.
- The 38.2% Fibonacci resistance has been overcome with the 50% retracement at $195.70.
- A move above this level will make the 61.8% resistance at $199.18 the next target. This is very close to the daily starc+ band.
- The long term chart resistance is in the $207 area.
- The lower starc- band was tested near the lows (see arrow) as the S&P 500 A/D line was forming a bullish divergence, line b.
- The S&P A/D line is now rising very sharply as it has moved well above the early February highs.
- This is a sign that the market rally is very healthy and it is also in a clear uptrend.
- The major A/D resistance at line b must be overcome to turn the intermediate term A/D line analysis positive.
The VIX hit a high of 30.90 on February 11th but closed at 28.14. The lower highs in the starc+ bands suggested that a top was likely in place.
- The VIX has now violated the support at line d.
- More importantly the VIX has closed well below the early February lows.
- There is next support for the VIX below 18, line e, with the starc- band at 16.39.
- Technically it will take a number of days and much higher VIX levels to reverse the downtrend.
What to do? The S&P futures dropped down to the support in the 1925 area overnight but have rebounded from the early lows. A day or two of sideways action would not be enough to alter the bullish technical readings. It will now likely take a move in the S&P to the 1970-1990 area to turn traders more bullish
I still favor our long positions in the EEM, XLB, XLU and DIA which were bought based on the bullish weekly Viper ETF scans. I am looking for other new entries where the risk can be well controlled.