Market internals have continued to remain overbought. For example, the PMO (Price Momentum Oscillator) on the above chart is near the top of its normal range. On the chart below we see three indicators representing the ultra-short-, short- and medium-term time frames. You can see how they have all reached overbought levels and topped. In a neutral or negative market, this would present a great sell signal, but you can also see how twice before these conditions failed to produce any serious decline. Perhaps the third time is charmed?
Bottom Line: Many market indicators are overbought and topping, presenting us with yet another setup for a correction, but bull market rules say we shouldn't count on it. A small pullback is more likely. To be sure, our bullish assumptions will ultimately prove wrong when the final top of this rally arrives, but our trend following models keep us from pulling the trigger prematurely. We remain on a 3/17/2009 medium-term buy signal for the S&P 500.
Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.
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BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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