Short-term Indicators Are Positive | Stock Market Investing

Sunday, May 4, 2008 | Home | Andy Mayo

The past week's rally closed out the week showing signs that it may be more than a bull rally in a Bear Market.  Numerous indicators are all positive for the short term, and after all, the long term is just the short-term repeated.

But as I've said before, expect a pullback -- the market moves steady by jerks.  The depth of the pullback will reveal whether this is a genuine change in trend from negative to neutral or positive or if it is only a "bull trap," that brief rally in a Bear Market that catches investors buying in to a short-term move too late.

For those following the Primary Trend, we are right on the cusp -- the slope of the 10-month moving average is flat or just starting to turn up.   The monthly price for the Emerging Markets exchange-traded fund EEM has crossed abve it's moving average and the other exchange-traded funds tracking major indexes are hovering, with DIA (the Dow Jones Industrials) and QQQQ (the Nasdaq 100) just above and the SPY (S&P 500 Index) just below.

All of the major domestic indexes have traced out an inverse head and shoulders pattern or a 'W' bottom, and these patterns typically indicate that the worst is over.  You can see the pattern for the S&P 500 Index in Newsletter.  It's critical that the S&P 500 not break the neckline by closing below 1395.  It closed at 1413, so our uptrend margin is still very slim.

Breadth indicators -- that tell us whether it's just a few stocks pushing up the index or whether the rally is more broadly distributed -- are all positive: 

The percentage of New York Stock Exchange stocks above their 50-week moving average and in a point-and-figure bullish pattern, broke above their long-term moving average on Friday; the same for those indicators for S&P 500, though not as robustly.

The Nasdaq 100 broke above its 50-week moving average, although the S&P 500 remains about 30 points below its moving average.

The put/call ratio appears favorable in the short-term.

The level of net new highs in the NYSE composite has held support at a point where previous rallies have occurred.  The chart is here.

The rising trend in the Volatility Index (VIX), on a daily basis, has been broken, but just by a hair; the prior low was 18.28; Friday's close was 18.18.  If this trend can continue, it is a definite positive for stocks.  See the chart here.

On the international front:  The strongest of the major market indexes is Emerging Markets (ticker EEM) which is well above its 50-week moving average.  Developed foreign markets (the exchange-traded fund EFA), just touched its moving average on Friday.  Charts courtesy of StockCharts.com.

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