Weekend Update

SPX target set 1150-1200; as technical market expectations have beat on the upside, it wouldn't be surprising to see 1300 hit on SPX within the next 4-6 weeks. Strategy is to add strong stocks on small pullbacks and to wade into index ETF's.

Current Market Tour

Resumption of rally

Our Market Tour on Stockcharts.com depicts bullish, bearish and neutral signals in green, red and black, respectively. Most signals today are green (bullish). Although the rally from the March lows has come a long way, we have routinely viewed SPX 1100-1200 as the target.

Bullish signals include an improvement in market breadth (advance deline and McClellan Oscillators moving positive), improved price relative of XLF (financials), RSI of the major indices bouncing above 50, maintaining its bullish range (40 on the low side, 80 on the high), OBV confirmation on the uptrend, and VIX RSI falling below 50. Put/Call ratio turned a bit bearish below 75 today, but this indicator was overwhelmed by the positive signals.

Today we added basing stocks from IBD100 and other strong relative strength stocks that settled down over the last week. Shorts were covered (for minor losses) and a new position in QLD was taken.

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Selective longs for a selective rally?

The indices turned oversold fairly quickly during this recent correction. In reviewing strong performers (since the March lows), several have formed solid bases and retracement patterns that suggest possible setups for further gains. Market breadth has been declining steadily as the indices have risen, suggesting that stock picking may be the best way to participate in further gains. The rally is tiring, however, so we will remain selective, set appropriate stops, and maintain some short hedges on indices.

Tuesday Update: An Aging Rally

Market Position: Neutral-Bearish

Tuesday's modest recovery (on light volume) from Monday's sell-off suggest either a pause in the correction (with more to follow) or the completion of a minor retracement that will precede new highs. Wednesday will be key to assessing the next short-term moves. Positives include RSI(14) bouncing above the 50-line (SPX and Nasdaq) and VIX deflecting from resistance near 27.50. Negatives are the light volume on today's bounce, the weak trend in market breadth (and divergences we have seen since the beginning of August), and resurgent strength in staples (at the expense of consumer discretionaries).

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Weekend Update

Current Position: Neutral-Bearish

We believe that further gains are limited at this point. Some decent basing patterns are appearing in IBD 100 stocks, however we feel that higher reward-risk is seen (vs. being long equities) in the following trades:

1. Long US Dollar (UUP).


2. Short gold (GLD).


3. Short FXA (Australian Dollar)


4. Long TLT or LQD (treasuries and corporate bonds).


5. We have initiated partial positions in short equities (QID, DXD, SDS).

Concerns with being long equities include:

1. McClellan Oscillator turning negative for the first time since the start of this rally in early July


2. NYSE Advance-decline EMA 5 dropping to negative


3. Relative weakeness in Nasdaq, where its Advance-Decline has also turned negative and the 2000 level represents tough resistance


4. The firming of the dollar


5. Weakeness in consumer discretionary stocks

Click here for our latest Market Tour on Stockharts.com.

Neutral stance preferred

Short-term: Neutral

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Momentum continues to suggest a consolidation. Breadth has been deteriorating on the NYSE and the Nasdaq as the market climbs. Recent outperformance of value vs. growth may point to increased risk-aversion, considering the strength of the rally since March. Financials have shown relative outperformance (a positive), while Technology has shows relative weakeness (a negative). A consolidation (rather than a correction) is more likely, with further gains ahead. This rally is aging, however, and profit-taking (as well as stop-tightening) may be prudent. For Dow Theorists, both the Dow and Transports have confirmed a new 2009 high.

Retracement expected

Market Position: Neutral-Bearish

Click here for the current Market Tour on Stockcharts.com

A pause in the rally is expected; SPX target is 940-960 (close 987), Nasdaq target is 1900-1940 (close 1979), for a 4-5% correction. Bear market rally targets remain at SPX 1100-1200 and Nasdaq 2050-2100.