Stocks up on Bullish Sentiment, But Stay Cautious

recent stock market gainsThe S&P 500 eyed key chart support at 1,130 on September 28, but managed to hold at 1,132. That was a key development, as the index broke above a key chart marker at 1,150 last Thursday and is looking to close above for the first time since May 13.

The bulls appear to be in control, but I do not feel totally convinced that gains are sustainable and feel that a correction is in the works before markets can trend higher.

The fact that all of the key stock indices are moving higher above the chart tops is bullish, but I still question the lack of strong trading volume. During the down days last Wednesday and Thursday, trading volume on the NASDAQ rose, which is bearish.

The bullish investor sentiment is clearly helping stocks, but you should watch the overbought condition. The trend of the NYSE NHNL had been edging higher, with 55 of the last 59 sessions bullish. In the technology area, investor sentiment on the NASDAQ has been mixed, with 33 bullish readings since May 6. The past 17 straight sessions have been bullish.

My concern is with the lack of trading volume, especially with the spike on September 24. And, unless we see higher volume, I feel that the current upside rally may not be sustainable. Should the chart tops fail to hold, we could see a downside move back towards the 200-day moving average (MA). The overbought technical condition will pressure rallies.

The near-term technical picture remains bullish, but you should watch for selling pressure due to the overbought condition.

Failure to hold could set up a bearish triple-top formation. A “death cross” continues to be in effect on the charts, in which the 50-day MA is below the 200-day MA.

In addition to equities, gold and silver have also been hot. The October futures gold blasted above $1,300 to trade at $1,314 an ounce. The analysts and editors of Lombardi Financial turned bullish in 2002-2003, and have remained so ever since. Although at times the bullion has had a rough ride, metal prices have turned around significantly and I believe the spot price of gold can easily creep up to $1,500 in the near term. The near term is bullish on strong Relative Strength, but the condition is overbought.

Silver is also following gold higher around $22.00 an ounce. Silver sometimes moves in sympathy with gold, but is a play on electronics demand.

On the energy front, oil prices have been rallying. Oil is bullish and broke above a key chart top at $80.00 and its 200-day MA of $80.65 to over $81.00. The near-term picture is bullish on relatively strong Relative Strength. I’m not convinced that prices will hold and feel a return to the $70.00-$80.00 range is in the works. This level is what OPEC wants to see. If it’s too low, profits fall. Too high and it could impact the global economic recovery.

As always, ride the gains, but take some profits along the way.