This week... rallied off short term oversold, at meditm term oversold, and Fed to hike interest rate

Was hoping to get this post out on Monday but wanted to wait until the Fed meeting to raise interest rate today. Anyway, since the last post, the stock market formed the pattern I was looking for... just not exactly what I was looking for. I was looking for a brief move down first but that didn't happen as the market bottomed and the rally back up was higher than anticipated. Monday the stock market was short term oversold so I was anticipating a brief rally early this week. Medium term, approaching oversold but would like to see more oversold in the stock market to get a solid buy signal. So even though stock market could be at short and medium term oversold buy signals I wouldn't be surprised in the next few days the market will move back down below Monday's lows before making the final bottom. From there the stock market should attempt to rally big back above the highs set this year. For the Dow, SP500, and Nasdaq, rallies to new all-times highs.

Short term oversold but medium term oversold weeks away...

From the last post, the SP500 did rallied another +2% before turning down. The rally high of 2116 didn't quite make it back toward the all-time but it did make it back above the breakdown point in mid August. Being short term oversold, will expect the stock market to attempt a short term rally by mid week after some brief selling Monday and Tuesday. The chart illustrated below shows the SP500 broke out of a Double Bottom pattern in early October and reached around its upside breakout target at the beginning of November. I anticipate a similar but smaller Double Bottom pattern could be forming in the coming weeks. The middle section of the rally should run into resistance and selling near the 200 day moving average (currently at 2007) and then a retest of this week's low to be follow. By that time, the stock market should be approaching medium term oversold and a setup for another move higher. I will update back in a several weeks on how this stock market scenario is play out.

Nice month long rally but at short and medium term overbought now

From the last post, I hinted that the major indexes should be back toward their summer highs within 6 to 12 months. Since then the indexes formed what is called a bullish "Double Bottom" pattern and broke above it early this month October. Going forward, I believe there will be a pause and likely correction back down a bit in the coming weeks. There could still be another 2% or so upside but I believe major indexes will give back about half the move up since early October. That put the support range at the 1975 to 2000 level for the SP500. From the stock market should found a bottom a move forward back above the summer highs.

Worst drop since June 2011 and one of the worst 6 day drop

The last two posts I cautioned about a narrowing price range and internal weakness but the last post I was anticipating a resolution with a break out of the narrow price range would be... with caution... to the upside mainly due to the positive price reversal back up on August 12. Wow, was I really wrong on that one. The break out turned out to be to the downside... -11% in 6 days... one of the worst on record. The largest was -21% back in October 2008. With the SP500 closing below its 200 day moving average, it closed as the 3rd longest streak, 3.8 years above it 200DMA, before closing below it on Monday. The longest being 7 years from October 1990 to October 1997. So what now? Obviously, the stock market is extremely oversold on the short and medium term basis. Majority of my medium term readings are extremely oversold but several important momentum readings are now only crossing over between neutral and oversold... due to the nature of the narrow price range of the past 6+ months. Another question to ask is are we heading to a bear market? I don't think so. I believe we are only in a +10% correction mode which happens to correlate with the 200DMA record I mention above. With the 10% correction occurring on Monday it marked the 3rd longest streak without a 10% correction. I believe we are still in a bull market and while the stock market may still probe several percentages lower in the coming weeks I believe 6 to 12 months from now the stock market will attempt to break out above its all-time highs of this month.

Short term signals have worked well recently... we got oversold and a bounce yesterday.

The major indexes have been in a very tight narrow trading range this year. Rarely getting close to medium term overbought or oversold but the short term signals have been very reliable as the major indexes reacted to them very well. Yesterday, the stock market did reach short term oversold during mid day and rallied back up. Going forward the stock market have been in a long consolidation with internal weakness underneath. Eventually this should result in the major indexes breaking down hard or breaking up strongly. I believe we will eventually break higher. Whether this short term rally will be the start we'll see.

Caution ahead as stock participation gets narrower and narrower

After the last post, the stock market had several up and down moves each lasting over a week. The last low at early July the stock market got near but not at medium term oversold. This resulted in a week long rally before pulling back about 1% for the SP500 this week. But broad stock participation has gotten narrower and narrower on each leg higher as the indexes are being pulled up by the big cap stocks. On a medium term time frame this usually result a +5% correction. Just when the correct will occur is unsure as the narrow stock market rally led by the major indexes could continue on for weeks or months. For the time being if one is still participating in the stock market , it's better to lightening up on small or individual stocks and concentrate on the major index ETFs. On the chart illustrated below, looking for the SP500 to hold at the black line support level to remain bullish. A break below the support line should result in more downside for the short term.

Back to uptrend support line... as stock market in a slow grinding move up

From last post, the SP500 didn't quite move down to the 2060 level or lower. Instead it got down to 2068 and then turned back up and did set a new all time high of 2134. During that time, much of the individual stocks were consolidating their moves instead of joining the major indexes higher. That hinted the upside was limited... and as such the major indexes have moved down this past week while much of the individual stocks continued to consolidate at current price levels. This also could hint the downside is limited. As the chart illustrated below, the SP500 is back down to an uptrend support line. If the stock market can hold at current levels then another rally back higher could be in the cards. But if the support level is breached then the upside trend could be broken for more consolidation or downside for the short term.

Looks like setting up for lower prices and medium term bottom later this month

From the last post, the stock market did moved up slowly but turned down by late April. Did reach near short term oversold last week but the two day rally that followed was brief and I see the trend to continue down for the coming weeks due to internal weakness (individual stocks being weaker than the major indexes.) As the chart illustrates, I will look for the SP500 to fall toward to the 2060 or lower levels before we see a medium term bottom setup for a rally back above the all-time high level of 2125.

Followup of last post... short term movements turning bullish

After the last post, the major indexes did turned down about 2% before reaching near (but not at) short term oversold levels and then bounced back a bit before turning back down back near the 2% correction. The small cap indexes, as shown in the 2nd chart, have held up better and are actually near their all-time highs at the moment. On the medium term levels, the major indexes went down as far as between neutral and oversold while the small cap indexes corrected down toward neutral. So no medium term signals but the past month action of consolidation hints to me of a slow move higher led by the small caps.

At medium term crossroads... market at overbought

Have been busy since my last post back in early October last year. As the chart below shows, there were two 'minor' medium term signals around Nov./Dec. and January. The stock market is still higher than my last call for a medium term rally in early October. Right now we are close to or at medium term overbought and would expect mostly weakness in the individual stocks in the coming weeks. The major indexes (Dow, SP500, Nasdaq, Nasdaq 100) could follow along with weakness too or they could continue to slowly grind higher for several more weeks before turning sharply down. Good time to start placing sell stop orders or/and shift to selling individual stocks into small positions in the major index ETFs if one decides to take the risk for more upside.