The pause/pullback is given way to a low soon...

The stock market gave up little ground since last week's signal for a pause/pullback and is now hinting of a possible short term low with a set-up for a rally. For the medium term, I'm uncertain if the stock market will continue to grind higher from current levels or that it'll content with consolidating and eventually sooner rather then later the need to retest it's 200 day moving average. In most cases, the major indexes will retest their 200dma within 12 months. It has been almost 7 months since they last touched their 200dma. So the uncertainty is will the major indexes continue higher for several more months and then crash back down (like beginning of May last year because of the 'flash crash' when it finally retested their 200dma after 10+ months.) Or the stock market will get over it by moving back lower (over +5%) and retest by summer time and then power back up afterward.

The chart below is the Nasdaq and will likely retest the 50dma (blue line) and because of short term oversold should get a short term rally. The red line is the 200dma and the uncertainty for the medium term is whether the stock market will retest it soon rather then later.

Great short term rally in need of a pullback/pause?

Very strong rally in the past 10+ days usually a very good indication of further upside for the next 6 to 12 months (or at worst, limited downside from the March bottom level.) While the major indexes have moved up strongly... Dow, SP500, and Nasdaq, there were some technology sectors that lagged or gotten hit to the downside such as networks and semiconductors. So while the long term view (6 to 12+ months) is still bullish for the stock market, the short term (from a few days to a few weeks) is due for some pullback. For the medium term (1 to 3+ months), the recent very strong rally has a history of being forwardly bullish but I would still be cautious of a bigger pullback or even a retest of the March lows if the pullback is more than +3%.

short term outlook with medium term set-up

Seemed like a very long week due to the disaster in Japan. Hope the nuclear plant crisis can be contained soon as the Japanese are strong willed people and definitely pull themselves back up.

The stock market took a beating this week and for the short term the Nasdaq and SP500 could rally back 4 to 5% from this week's lows to back toward 2720 and 1300. There are two possible scenarios (out of many) that I could see occurring. Scenario 1, after a short term rally the stock market will return back down to make a new lower low for a medium term bottom. Scenario 2, this week is the medium term bottom and the short term rally will be followed by a very brief pause or pullback and then finally start a new rally higher toward the February highs (and maybe head much higher afterward.)

Will monitor how the scenarios develop for the stock market. For now, at least a short term bottom.

medium and short term outlook

The Nasdaq is down about 3.6% since the highs of last week. Thought the Nasdaq could make one last strong rally higher. It could but the correction that started from last week is starting to look like there could be some correction and consolidation for the coming months. A break below last week's low of 2705 could confirm such a pause trend. The long term trend remains bullish. For the short term, and possibly the medium term, a correction and consolidation of the 6 month rally off the late August lows is needed. Asset allocation remains on the low side of less than 30% or switch to all cash.

long term and medium term view

Thus the stock market continues to move higher as there are renewed rotation of money into stocks that corrected or pulled back from most of the 4th quarter. This type of market action should strengthen the long term view that the stock market is still in bull market mode since the March 2009 bottom. The medium term and short term has the market being overbought as the major indexes won't pullback and now there is rotation of money into different sectors to assist the market higher. Due to the high readings on many indicators, asset allocation to stocks from one's portfolio is advised not to exceed 40%.

medium and short term revisited #2

In last post the market did get about a 5% correction... though about 2 weeks after the post. Since then the major indexes have rallied back up to their November highs. In the meantime I noticed some speculative/leading stocks took big hits down and recovered less or mildly while some have recovered strongly with the major indexes.

We are now at an important level of whether the market either breaks out higher or turns down for about a 10% correction. The bullish seasonality and plenty of bullish professional 'smart' traders call for more upside. I believe we already had an earlier Santa Claus rally and could pause or correct for the time being.

medium and short term revisited

The last two short term posts for potential weakness did not pan out as the stock market continued to grind higher. The heads up now is that the negative divergences for recent weeks are still hinting of possible correction on the horizon. Note from the chart that the rally since the beginning of September has been quite similar to the February to April rally. Not that I suggesting a similar crash could happen too... just that if there is a correction around the corner then I expect the support level around the Nasdaq 2325 to halt further drop.

My last medium term post called for a large rally based on the Inverse Head and Shoulders pattern of the SP500 has worked quite well. My target of above 1130 have been achieved and the uncertainty of whether the April highs of 1210s remains possible... but as this post here is to warn of potential correction back down first.