A Short-term Breather

A number of market technicians have pointed to the S&P 500 and its approach to its 50 day moving average (see accompanying chart*). While such levels have a spotty predictive track record, it does seem likely that stocks are poised to take a breather from their 20%+ climb off the floor (752.44, which some are calling a major market bottom).

The more predictive element in this bear market rally breather view is the just barely short-term overbought reading (third indicator on the chart, Slow Stochastics >80), providing the trading justification for a pause. That said, it must be noted that the near-term indicators tracked – Momentum and MACD – have rarely been more bullish (first and second indicators on chart).

Investment Strategy Implications

The bottom-forming debate now centers on whether we are experiencing a 1974 style process (September/December 1974) or the 2002/03 variety (October 2002/March 2003). Its resolution remains to be seen as the longer-term mega trend reading across all markets and styles is decidedly bearish and will take many more months to resolve**. For the near term, however, the strength in current rally run has solid technical legs underneath, a near-term breather notwithstanding.

*click image to enlarge.
**To learn more about how the mega trend works, click here