Bullish for the Time Being

With the S&P 500 down over 2% to near 805 support and financials down about 5.5% at Tuesday's close, our trading model is taking profits on the shorts added at Monday's close. After Monday's huge rally and today's pullback, the S&P 500 is only 3 points (less than .5%) above Thursday's high, and financials are over 7.5% lower than Thursday's high.

Despite overbought short-term conditions, this market has powered higher from every pullback in this rally so far. Given our positive intermediate view of the market, along with clear bouts of frenzied short covering after recent pullbacks, we're being conservative on our shorts, with a stop at Tuesday's high for remaining shorts. With a large number of shorts looking to cover, and 800-805 previous resistance now providing support, we could see another surge higher even with short-term technicals extended.

Looking back over the last couple of weeks, our trading model got heavily long right at/near the bottom for this rally in the upper 600's on the S&P 500 (after being heavily short from the 780 area, and the upper 800's before that). However, it reversed to short based on short-term overbought conditions too soon, as this rally has been much more powerful than other recent rallies. It also covered on the pullbacks only partially, when in retrospect it should have reversed to long given our positive intermediate-term outlook.

We're fine-tuning our trading model to be much more careful reversing during a trend, and much quicker to close out counter-trend moves going against our outlook. Also, when we see upside coming, such as during yesterday's consolidation just under 800, our model will reverse to long rather than partially close out positions, as it did ahead of the Fed meeting last week.

Here's the updated weekly S&P 500 chart, again showing one reason we have a positive intermediate-term outlook:

The bullish divergences, bullish cross buy signal on PPO, and the breakout over the January low and downtrend line from the January high are all very positive signs for the intermediate term, despite conflicting signs from shorter-term charts.

Here's a daily chart of the S&P 500, along with 90% upside volume days and 90% downside volume days:


This chart, along with the article we linked last week , illustrates another reason we have a positive intermediate-term outlook. The strong series of 90% upside days during this rally, after the many 90% downside days in recent months, are a clear example of the major turning point signals discussed in the article.

We continue to be bullish over the intermediate term, though the market could pull back as far as the lower 700's on the S&P 500 before resuming the rally.

Open Positions: 25% short S&P 500, 15% short financials, speculative traders short an additional 15% S&P 500, short financials an additional 20%.

Comments

[Mad Hedge F...:]

How about these technical indicators? Satanists, occultists, and Tarot cards readers who follow the market closely (yes, there are some), called the S&P market bottom one point above the sign of the devil at 666. Does this mean my performance will improve if I draw a pentagram on my front door and engage in ritual chanting?

Mar 24 08:02 PM

[William Cowie:]

The thing about the technical indicators is the self-fulfilling prophesy aspect. There is a critical mass of individual traders who ascribe value to these indicators and they trade, manually or through programs, using these factors. Moving, as they do, in a herd, they do affect the market, and therefore I believe it pays to listen to what they're saying.

As I see it, the jury is still out on whether the bottom we saw a week or so ago will be the final and ultimate bottom, or whether it will be the next step on the slide further downward. In another recent article, someone listed 10 reasons why we've not hit bottom, and a commentator rebutted with 10 good reasons why we have. Both sets of arguments are solid, but both obviously can't be right. We just don't know which one will win out. Personally, I have a gut feel we're close to the bottom, either behind us or still ahead of us.

Mar 24 09:33 PM

[Paul_L:]

Keep up the very good work. I have been closely following your articles and found them very helpful.

Mar 24 10:34 PM

[nycDem:]

I also enjoy reading your work. Thanks.

Mar 24 11:43 PM