— “Calling the Trend” Column, by George Leong, B. Comm.
There is no debating the fact that stock markets are on a nice uptrend at this time on strong market breadth and bullish investor sentiment. Yet, as we have seen, you need to watch the extremely overbought technical condition and selling resistance, as stock markets edge higher. The reality is that, after the gains in 2009 and in the first quarter of this year, we need to see reasons for markets to trend higher.
The DOW touched a new 52-week high of 10,869.55 on March 19, and it is trading at its highest level since October 2008. The steady gains over the past three weeks have been impressive. The ability of the major stock indices to hold above key support levels has been positive.
As we move forward, here is my near-term technical view.
Investor sentiment continues to be bullish and this will offer buying support to stocks. Investor sentiment as reflected in the new-high/new-low ratio on the NYSE has been bullish in 233 of the last 236 sessions (98% during this time) back to April 9. In the technology area, the NASDAQ had been bullish in 195 of 236 sessions, or 81% of the time.
The near-term technical picture is bullish with strong Relative Strength, so we could see more near-term upside moves.
Market breadth as indicated by the advance-decline line has been mixed, with six of the last 10 sessions above 1.0. The overall trend is bullish.
The NASDAQ is above its 20-day moving average (MA) of 2,321 and 100-day MA of 2,223. The index is also above its 200-day MA of 2,102.
The index is extremely overbought, so watch for selling pressure. The near-term upper targets are 2,400 and 2,458.
The CBOE NASDAQ Volatility Index is stable at below 20, an indication of reduced market fear. Some contrarians view this as a selling signal.
On the blue-chip side, the DOW has been steady over the past three weeks, and it is trading at its highest level since October 2008.
The near-term technical picture for the DOW is bullish, with strong Relative Strength. The DOW is above its 20-day MA of 10,540 and its 100-day MA of 10,359. The near-term targets are 10,878, 11,000, and 11,060. You should watch this, as the index is extremely overbought.
In the broader market, the near-term technical signal for the S&P 500 is bullish, with relatively strong Relative Strength. The S&P 500 is above its 20-day MA of 1,135 and its 50-day MA of 1,116. Lower support is at key support of 1,060 to 1,080. Upper resistance is at 1,185 and 1,200. Watch the index, as it is extremely overbought.
The CBOE S&P 500 Volatility Index is holding below 20, indicating reduced fear.
The market leader has been the small-cap area, as the Russell 2000 is up nine percent this year. The near-term picture for the Russell 2000 is bullish, with relatively strong Relative Strength. The index is above its 20-day MA of 660. Lower support is at the 50-day MA of 636. In the near term, watch for resistance at 696. Watch the index, as it is overbought.
The key is to ride the rally, but, at the same time, take some profits off the table, especially on some of the big winners. If you are up over 100%, take profits on half of the position and let the other half ride.