Another short term oversold is near but risk is now very high

My last two posts were written after the stock market was coming off corrections and reversed the trend back up. Each of those two times, I was waiting for another percentage or so more drop further down from the major indexes before reaching short term oversold levels (which didn't happen.) So I'm jumping the gun a bit early here if the stock market tries to reverse the trend back up before the week is over. Note that these last two rallies lasted no more than 3 or 4 weeks before stalling. And given the last several posts, I have been concerned about the major indexes being overstretched above their respective 200 day moving averages. We are now approaching 13 months since the SP500, Russell 2000, and NYSE Composite last touched their 200 DMAs. As illustrated from the charts in the last post, this raises the risk of a sharp and swift sell-off back down toward the 200 DMAs. The SP500 is 7% and the Nasdaq is 10% above their 200 DMAs and that would be big sell-offs if that would occur this month. The seasonality of December tend to be minor weakness into mid December and then a Santa Claus rally into the end of the year. So if there is no further strong correction this month then January or February could be targeted for a possible large sell-off instead.

Indexes holding up better than stocks and are we at a momentum driven bull market?

From last post I commented above the pending high risk of a correction because the major indexes normally retest their 200 DMAs (200 day moving averages) within 12 months. So the 12th month should be about the mid to late November but thus far no correction as I had anticipated. I did initiate some long positions (40%) and short positions (about 20%) but with the market not doing much and the risk involved I had reduced my positions to 20% long. While the last four weeks the major indexes had consolidated or pause at current levels, individual stocks had underperformed with stronger corrections.

Surprisingly, last Thursday's sharp sell off came close to setting a strong short term (and modest medium term) buy signal if the SP500 dropped +1.5% further down (like in early October had the SP500 also dropped another +1%.) So with today's strong rally, it could be another move higher like the rallies of late August and early October. The risk could still be there as I warned from my last post but I'm warming up to the fact that this long term bull market has strong momentum behind its back.

In the charts below I will look at the times when the SP500 have gone over 12 months without retesting their 200 DMAs and what were the outcomes. Most of these occurred in the midst of the bull market run from the early 1980s to 2000.

The chart above has the SP500 go nearly 15 months before a sharp correction in October 1997 to eventually retest (touched) its 200 DMA and then make a quick bounce rally back up. A note, the SP500 did not go beyond 12 months during the parabolic dotcom bubble of 1999 to March, 2000. The Nasdaq bubble burst in March, 2000, after going nearly 18 months without retesting its 200 DMA.

The chart above shows two strong rallies that lasted nearly 15 months each before quick sharp corrections and in both cases they both recovered to continue the momentum trend higher (though the 1st correction was followed by a long consolidation/pause.)

The chart above again saw a quick sharp sell-off below the 200 DMA and then a recovery before moving higher.

The last chart above, was the rallies that started them all for the secular bull market of early 1980s to the eventual top of 2000. The first 2 rallies lasted nearly 15 months and the last two lasted less than 12 months before they retested the 200 DMAs. The Crash of 87 halted the five years of an exceptional rallies and return for investors.

My conclusion from the charts, is that an eventual retest of the 200 DMA will likely be quick and sharp... and will spook the investors. But the fact that this type of market behavior of strong lasting momentum rallies have occurred during long term bull markets.

Oversold rally last week but downside risk still high

Heading into the start of last week the stock market was quite short (and close to medium) term oversold which was I was looking for a downside move from my last post. I did entered some leveraged long positions last Tuesday and Wednesday and got out on the strong rallies of Thursday and Friday. The two day rally was much stronger than I anticipated. Could the near medium term oversold hinted last week warrant an uptrend rally for several weeks? I am inclined to jump in on the long side but with less risky positions and limited allocation (less 20% of my portfolio with very close stop loss.) I am still worried about the downside risk due to the current overstretched 200 DMA (see last post) as the SP500, Russell 2000, and NYSE Composite indexes approach their 11th month since last touched their 200 DMA (the Dow did touch it last week and which could had launched the two day rally.) There were several cases in the last 25+ years where the stock market has gone as long as 18 months but that is very rare and pushing the extreme cases. The chart below illustrates the last time the Nasdaq was a few weeks from its 11th month without touching the 200 DMA and overstretched. This was in 2010 which the stock market crashed due to the 'Flash Crash.' The red ring/circle in the chart indicates the 11th month since last touched 200 DMA in 2010. Not that it'll happen but the government shutdown and the debt ceiling crisis concerns this week could make a good excuse despite the big rally last week.

Overbought and could be more risk this time as the 200DMAs are stretched for the major indexes

From the last post, the stock market rallied higher after making a short rally and brief correction lower as forecast. Short term overbought hints were alerted last week. As stated in past posts this year, the stock market ignored this short term signal and continued to rally for several more weeks before finally turning down. But this time it could be different. As I looked at the charts I noticed that the 200 day moving averages of the major indexes haven't been touched in over 9+ months. Rarely do the indexes goes beyond 12 months without touching their 200DMA. Not only it's being over 9+ months but the indexes are quite overstretched away from the 200DMA so the risks have risen greatly. The stock market can continue to move higher for a couple more months but that will also raise the risk of a possible larger sell off later. So for now is advised to start to take off majority of positions (or even prepare to completely scale out of all long positions) and wait for the indexes to come back down toward the 200 DMAs.

Stock market oversold so looking for a short term rally this week

Was busy this weekend, so a quick note this morning. From the chart provided, there are two blue ring circles. The first ring circle, this could be what I'm expecting the rally will be like for this week... a rally and then a failure leading to an another low before an eventual rally back higher. The second ring circle, instead this could be that the stock market hits bottom this week and then rally to new highs... this my 2nd option to look for. Note that the chart is from today's morning trading so the outcome is still unknown until the market close later today. Also, of the major indexes, the Nasdaq is holding up much better than the SP500, the Dow, and the Russell 2000.

Major indexes at new 52 highs or record all time highs but I'm seeing negative divergences.

After a brief pause or correction in mid July, the stock market major indexes have moved back higher. My call for a rally in late June, whether it would be a short or medium term one, has turn out impressive. From my last post, I advised moving away from individual stocks to index ETFs as many individual stocks had performed outstandingly but could be targeted for profit-taking and corrections. As the chart for the Nasdaq exchange I have provided in this post shows, there are some signs of negative divergences. The 1st small chart shows the daily indicator of the New Highs minus the New Lows with the 5 day moving average (MA) lagging behind this week's highs made by the major indexes. The 2nd small chart shows the  indicator of the 7 day moving average of the advancing stocks in the Nasdaq exchange struggling in the past week. Maybe in the coming weeks these two indicators will 'catch' up as the stock market continue to move higher thus negating the negative divergence in recent weeks. Or this could be hinting underlying weakness that will eventually take down the major indexes whether it will take a few more days or weeks before a big correction for the short term horizon. So for now, caution should be taken and have in place of sell stops if one still have long positions in play.

Nice two week rally leads to a short term overbought

The short term rally I was looking for from the last post has resulted in a two week rally for the stock market. This has now given short term overbought signals so a pull back or consolidation would not be of a surprise this coming week. I had a good two weeks so I may take a few profitable positions off the table for the short term. But as noted in the May 1st, 2013 post (please read for reference,) the medium term trend is still up for the time being as the indexes could continue to slowly grind higher while individual stocks could take the brunt of the correction.

Expecting a short term rally and possibly a medium term trend higher.

From the last post, the market did get a brief rally that turned into consolidation and then finally a probe lower below support today. The Dow did finally touched its 50DMA two weeks ago. When the support levels broke today the major indexes just sold off quickly at the latter portion of the day. There could be more downside tomorrow morning but I now anticipate the short term trend will turn to the upside for the coming days and likely weeks. The medium term could shape up for a 'summer rally' but will have to see whether the major indexes can break above their 52 week highs set last month May.

Short term oversold hints a brief rally to occur soon...

From the last post, I noted that short term overbought sell signals during a bull market tend to give way to the upward momentum at least several more weeks before turning down. And that continued for much for the month of May until the last week when the indexes finally turn down. Also I mentioned that index ETFs will outperform individual stocks as the stock market goes through what is called an 'internal correction.' While the indexes have been down this past week, there numbers of individual stocks have gone through corrections in the prior weeks. Like the rest of global stock market, the corrections have lead to a short term oversold condition hinting for a brief rally to occur soon. The Dow came close to touching its 50 day moving average which has been 5 months when it last touched the 50 DMA. The Dow index could touch it tomorrow, will see. The strength of the anticipated rally will tell whether the stock market will be able to rally back to new 52 week highs or that there will be more consolidation for several more weeks before moving higher again. Will keep you updated either with comment(s) to this post or with a new post... as this develops.

The expected rally has lead to an initial short term overbought signal

From last post I was looking for a rally to occur but this rally has turned out to be much stronger than I anticipated. Of the major indexes, the Nasdaq and the SP500 has recovered to make new 52 week highs while the Dow and Russell 2000 haven't accomplish this feat yet. As the chart illustrates each of the last 3 short term oversold buy signals lead to at least a month long rally. And in a medium term bull market that was signaled in late November 2012, the initial short term overbought sell signals had not hindered the upward thrust when the sell signals occurred. So should this week's sell signal be ignored again? Usually each successive sell signals will add more individual stocks into a more severe correction that will eventually include the major indexes when the medium term trend ends. For now, better to be cautious of individual stocks by switching to the ETFs of the major indexes. One concern I do have is that only the Dow has not touched its 50 day moving average yet this year (as indicated by the blue line in the chart.) The other three major indexes, the Nasdaq, SP500, and Russell 2000 have touched their 50DMAs. On average they touch their 50DMAs within 3 month or less and for the Dow it is currently 4 months. This is the longest since 1995 when it took 6 1/2 months before the Dow retouched its 50DMA which at that time was a great period to be in the stock market during its bull market run.

Market was weak as anticipated and now another ST oversold signal.

From last post there was a short term oversold buy signal and I cautioned that this time due to weakness in the stock market in general compared to the indexes (what is called negative divergence) I anticipated further weakness to the downside whether or not the stock market rallied. Right now most of the major indexes along with stock market gave back all and more of the brief rally that occurred last week. Only the SP500 and the Dow had held up better. Which now leads us to another short term oversold signal and again I do not anticipate much more than a week or so of upside. But looking at the medium term signals they are now getting close to between 'neutral' and 'buy'. The stock market could rally off this medium term signal or could continue to pause and struggle for a few weeks to reach a lower level to generate a medium term oversold buy signal. For now continue to use caution or just stay out for the time being.

At short term oversold but will the market bounce again this time?

From the last post there was a short term sell signal but looking at the major indexes of the Dow, SP500, Nasdaq, and Russell 2000 since there seems to be more of a pause then a correction. Only the Russell 2000 started to suffered a sell off this week. While the major indexes had looked calmed, individual stocks have underperformed the stocks in the indexes. This is what technicians call negative divergence where the underlying stock market is weaker than the major indexes. From Wednesday's correction, a short term buy signal came close to being activated but backed off a bit from today's, Thursday light rally recovery. The last two times where a short term buy signal was activated or close to being activated were at the last week of December 2012 and in late February 2013. The stock market rallied off nicely after those two time periods. So will the 3rd time be a charm again? Due to a lot of negative divergences that have accumulated in the past month I would be caution that this week's weakness could lead to more downside for the short term despite an oversold signal being given off on Wednesday (or trade the bounce rally as quick short term plays and with minimum amount of capital.) From the chart illustrated I would look for buying support at the SP500 1530 area.

Another breakout rally

Toward the end of February most of the major indexes moved down to touch or get close to their 50 day moving averages as I had cautioned from the last post. At the beginning of the last week of February there were a few indexes like the SP500 that hadn't touched its 50DMA and I was anticipating that it will signal a short term buy signal when it does touches it. Didn't quite get there for the SP500 as the stock market just rallied instead since then. As the chart illustrates the SP500 found support above the 50DMA and the green uptrend support channel line. There's also a red uptrend resistance channel line that could give pause or pullback of the SP500 when it reaches that level. As the January 2nd post stated the rally since the beginning of the year could be a major breakout higher for the global stock market as it seems like it thus far despite negative divergences in some indicators (for example, the new 52 highs of stocks is lagging the price movement higher of the major indexes.) The rally could continue to move slowly higher but like the recent correction in February has shown... it can take a week of correction to give back almost four weeks of rallies. So there's still some risks as I am getting short term sell signals but the stock market has shown the ability to getting buying demand in this break out higher rally.

Reversion back to the 50 day moving average

It has been a slow move higher for the stock market since the beginning of the year. The chart I will review today is the Russell 2000 which broke to new all time high at the new year and has continued higher. Most of the global stock markets have also streaked higher too. At present many of the indexes' 50 moving day averages are being 'stretched' for the time being. In most cases, the indexes don't go beyond two to three months without 'touching' their 50 DMAs. It's being over two months now for some of these indexes like the Russell 2000. So for the short term, I would expect the stock market indexes to either move back down toward the 50 DMAs or they could meet half way as they consolidate/pause at current price levels. These break outs to higher levels appear to be bullish for the long term. But at the same time I'm reading some reports of some sentiment indicators that are at extreme levels usually related to at or near stock market tops. So for the time being I'm still personally in about +20% long positions with sell stops ready in place when there's a break down. And since my signals are still hinting short term sell risk, I won't be more aggressive until the signals move back toward higher reward buy signals.

Is this 2 day explosive rally bullish for the long term?

Being enjoying the holiday season and was waiting to add a new post at the new year. Since my last post a month ago about overbought risk, the major indexes of Nasdaq, Nasdaq 100, SP500, and the Dow either consolidated or pullback back a little. Though the Dow Composite and Russell 2000 indexes did better by moving higher instead and that's usually a bullish indication of the current momentum higher. Toward the last trading days of the 2012, the market was at or near oversold level and I was waiting for the SP500 to fall below 1390 before I initiate a +75% buy position and short term buy signal. That didn't happen as the lowest it got was 1398 on Monday and proceeded to rocketed higher on anticipation of the deal against the 'Fiscal Cliff' and rocket higher again on Wednesday on the deal being completed. Instead I got in late the last two days on less than 50% positions. The last two days was a rare occasion of having 90% of stocks closing higher for two straight days. Such occasions in the past has generally being bullish for the stock market 6 months afterward. The Dow Composite and the Russell 2000 already made 52 weeks high which is very positive. So will see if the stock market can maintain a bullish momentum occur again for the coming 6 months. For the time being, the stock market will be at overbought level tomorrow and if it can weather a light pullback in the coming days then that should be a positive indication for higher prices for the 1st half of the new year.