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.