Sunday, September 30, 2012

This Pullback Is A Gift

In last week's post No Reason To Bearish, I showed some charts that showed the S&P500 is due for more of a pullback; the market has cooperated and is giving us a low-risk entry for going long. In the charts below I will show why the pullback may not be over, and I will show why the market will at least put in a double top, rather than go straight down from here.

The chart below is one I have been posting quite a bit this past month, and it has been very useful in determining what the market is going to do. It is the S&P500 and its 13-day EMA; the indicator below is the Percentage Price Oscillator with modified settings. The Percentage Price Oscillator has been changed to measure the distance between the S&P500 and its 13-day EMA. I have circled in red the many instances where the S&P500 has hit resistance (in other words, it is too far extended from its 13-day EMA) and pulled back to its 13-day EMA before zooming higher. As the indicator predicted, we have pulled back, and now price is hovering around the 13-day EMA. From this indicator you can conclude the market is just having a very healthy pullback, giving traders/investors a nice opportunity to go long. It is only a matter of time before we resume the uptrend. There is one caveat: the market can go lower, as the Percentage Price Oscillator has not hit support (shown by a horizontal vertical red line), so there is still risk here.
SPX SP 500 13 day EMO PPO percentage price oscillator

The chart below is a very interesting chart; it is the hourly chart of the S&P500. It is very intriguing that the S&P500 has found support at its 200-day EMA twice and has bounced off of it (circled in black). However, be warned; if we test this EMA again, I am not so sure it will be providing support, as it has the last two times. Remember, the chart above shows the market can still go lower.

hourly sp500 stock chart 200 ema

The chart below is a replica of Tom McClellan's chart with my own analysis. It is the Cumulative Advance Decline Volume with 19, 39, and 199 EMA. The chart shows that the advance/decline volume must stay above the 19 and 39 EMA otherwise there tends to be a quite a bit of damage done to the S&P500. Right now the $NYUD is below the 19 EMA; if we lose 39 EMA support the market will probably be in the category of a nasty correction rather than a healthy pullback. Right now the Cumulative Advance Decline Volume has slipped below its 19 EMA. This chart shows that Thursday's up-move was just a bounce, as the 19 EMA acted as resistance. I have highlighted in yellow what happens when $NYUD dips below the 19/39 EMA; things get ugly. For now the chart says we are in a minor correction; watch for the $NYUD to dip below its 39 EMA for reasons to be concerned.

$NYUD advance decline volume analysis

The chart below is Small Growth Caps versus the S&P500. The red trend lines mean that small growth caps are outperforming the S&P500. When this occurs, it is a sign that there is a lot of liquidity in the market. What this chart shows is the market never tops out when small growth stocks are outperforming the S&P500.  Since there is a healthy amount of money in the market, what tends to happen is the money invested in growth stocks tends to move back into the bigger stocks. Recently the uptrend line has been broken highlighted by the vertical dotted blue line, so it is a matter of time before the market, at the very least, makes a double top rather than just going down, since there is so much liquidity in the market.

$iwf vs sp500

The McClellan Oscillator is a good indicator that has reliably marked bottoms in the market in the past. I have circled in blue where readings of -150 have shown to be bottoms (oversold), except in June, where the McClellan Oscillator gave positive divergence. This week the Oscillator did not get to an oversold reading, so maybe this market has not finished correcting. However, the Oscillator did get pretty close. After having a complex overbought structure, the market rarely ever tops out; right now the correction in the market is working off the overbought structure that was created in early September. In summary, the McClellan Oscillator is saying we still have enough energy to push prices higher.

$NYMO McClellan Oscillator