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Monday, July 20, 2009


Rally Continues -- Short Pullback/Consolidation Time?

...if the market can hold the 927-930 "Confluence" area on a closing basis during this consolidation, that would be extremely bullish, and then shorts should be prepared for some more squeezing. If the SPX rallies a bit more in coming weeks, the 13-day EMA should cross back above the 34-day EMA for a buy signal, and if it breaks out above June's high, it will invalidate the Head & Shoulders pattern.

On Friday's brief consolidation/pullback, the S&P 500 held well above the 927-930 "Confluence" area, and then shorts got squeezed more today as the SPX closed above June's closing high. As this chart shows, the 13-day EMA crossed back above the 34-day EMA for a buy signal (red line crossing back above blue line, with the black line above the horizontal line showing the 13/34 EMA difference is positive), and the Head & Shoulders pattern that sucked in more shorts is no longer valid:

So two of the signals that were in the bears' favor are no longer sell signals, and one has turned into a buy signal, joining the "Golden Cross" of the 50 day moving average crossing above the 200-day moving average.

The S&P 500 has rallied nearly straight up over the last 6 trading days, gaining about 9%. After such a sharp move, it could use a healthy consolidation/pullback to set the stage for the next move higher.

We posted this chart of the 10-day EMA of the TICK back on Saturday, April 18 , using it as one indicator pointing to a big down day on Monday, April 20 (when the Dow closed down nearly 300 points):

If Monday starts a pullback like the last 5 times this TICK 10-day EMA peaked over 600, the market should sell hard into Tuesday at least.

Each of the 5 previous times, marked with a vertical blue line, the market sold off the next couple of days, twice bouncing back up off the second day low.

With all the bullish technicals, we're not likely to see as big a down day any time soon, but this indicator does point to a likely pullback very soon. If we get a short pullback like the last 6 times during this rally, the second day of the pullback could be a great buying opportunity yet again.

The healthiest thing for the market would be a short consolidation/pullback over the next couple of days that holds the 927-930 "Confluence" area. The next level of resistance is the June intraday high of 956. Above there, there's not much nearby resistance, so the market can move swiftly higher, especially after a bullish consolidation.

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