Very interesting technical commentary today...............
07/18/2012-02:52 PM ET MID-WEEK TECHNICAL NOTES
We think the stock market may be emerging from the typical choppy bottoming formation and into a very fluid move higher. This potential "sweet spot" of many 5-wave advances usually sees many weeks of consistently higher prices, where pullbacks are bought, and investors with cash are left sitting on the sidelines waiting for decent-sized pullbacks that never materialize. We saw these fluid moves in the 2010/2011 rally as well as in 2012. It also forces bearish institutional investors to allocate capital toward stocks and forces bearish strategists to upgrade their opinions, fueling further gains in stocks.
We believe the next piece of potential resistance for the S&P 500 is up in the 1,400 to 1,422 area. There is chart resistance in this zone from the topping pattern earlier this year. Trendline resistance, drawn off the peaks since early May, comes in just below the 1,400 level when looking out a week. In addition, a measured move based on the size of the completed inverse head-and-shoulders formation, has targeted the 1,400 zone for many weeks. Bullishly, however, the top from earlier this year was rather small from an intermediate-term perspective, so it is possible that prices will just charge through this region and on to recovery highs.
We think a break to new recovery highs above 1,422, which we see, would open the door for a very strong advance up to the high 1,400/low 1,500 area by the end of the year. We are seeing some very bullish signs from a longer-term perspective, leading us to ponder the thought that the secular bear market may be coming to an end. The NYSE advance/decline line recently hit an all-time high, demonstrating strength from an internal standpoint. The NYSE a/d line does have its flaws, as it has a fair amount of non-equity type securities, but the line has done a decent job as a leading indicator. Secondly, Wall Street Strategists are recommending a very low equity allocation, while recommending a very high and defensive bond allocation. What's fascinating about these readings is that market seers many times get bearish on stocks when stocks have already gotten pounded, not when the market is still in a bullish trend. Third, and just as important, we have noticed some mega-cap stocks that have emerged from decades-long bases, breaking out to all-time highs. Technically, breakouts from massive bases have tended to be very bullish, and a sign that a new secular bull market may be in its early stages. Finally, there is a whole host of fundamental and technical investment gurus calling for another crash along with devastating recessions around the globe. Generally, these gurus have a very bearish long-term slant, so I guess this is not surprising. However, it is rare for anyone to call a crash in his lifetime, and when the masses line up all on one side, it's time to go the other way.
Crude oil continues to act well technically, and based on the size of the completed inverse head-and-shoulders pattern, we think we could see a measured move up to the high $90s/barrel area. After that, prices face a large area of overhead supply. Gold, on the other hand, has not acted well, despite what we thought were some extremely oversold conditions and very bearish sentiment. A break under $1,500/oz. could open the floodgates on the downside and end the bull market that started over 10 years ago.
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Mark D. Arbeter, CMT - S&P MarketScope