Sunday, December 2, 2012

The Bulls Are In Charge

In last week's post, I was somewhat neutral in where I thought the market was heading, with a slight bias upward.  Last week's action was very impressive; the market was overbought.  Instead of crashing downward, it filled 1 of 2 gaps below and bounced higher. According to $TICK and $NYMO, and some proprietary indicators I follow, the market is still overbought (not a bad thing). It will be interesting to see if the markets dip and rebound, or just continue higher next week. Remember, there is nothing more bullish than a failed bear signal. I think we got a lot of questions answered last week. Based on the McClellan Oscillator and the Ratio Summation Index, the market should see higher highs within the next two weeks to a month. I will extensively go over the Summation Index and explain what needs to happen for the market to continue its uptrend and make higher highs. During the week I posted two charts: Aussie-Yen and Euro-Yen that are highly correlated with the US market, which say the market should be going higher. This seems to be confirming what breadth numbers are saying when interpreting the McClellan Oscillator and Summation Index. I will go over that more in-depth in this post. Finally, I will give two price targets for Apple IF the markets continue to be bullish.

The chart below is the McClellan Oscillator. Last week I discussed how the bounce the market had in May (prior to the market crashing), failed to reach +150 (in others words just a bounce), then fell over. This time around, the McClellan Oscillator was able to make a complex overbought structure (shows strength by the bulls) above 0. The market rarely tops out when this occurs; we should see equal highs or higher highs in the intermediate term (2 weeks to a month). The higher  the $NYMO goes above 150, the stronger the message by the bulls. 

The chart below is the Ratio Summation Index (calculated by adding the daily values of the McClellan Oscillator) which says we should have higher highs (due to its +500 reading from June-Oct); so far it is fulfilling it promise. What is important about this indicator is that it needs to reach +500 AGAIN before pointing down again. That is not a very easy task to complete; it's still pretty far away. Failure to reach +500 before dipping back down again usually results in the lows being re-tested and leaving the possibility for even lower lows. So, in other words, the Ratio Summation Index is promising us higher highs but until it reaches +500 again, this up-move is just a bounce and the market is susceptible to falling over again. If this is a bit confusing, think of it this way: Summation Index is used to measure long-term moves, while the McClellan Oscillator measures intermediate-term moves.

The chart below is Apple's weekly chart. What is interesting is that in the last few years, Apple  has been bouncing off its upper, middle, and lower Bollinger Bands like a game of ping pong. A few weeks ago Apple bounced off its lower Bollinger Band; if past history is correct, Apple's next target is the middle Bollinger Band, which is now at $620 (these targets change weekly based on volatility). If that target is reached, the next target will be $700+. These targets are realistic only IF the markets continue to be bullish. Try not to trade based on these charts; there has been a lot of technical damage done to $AAPL's chart.