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Tuesday, October 28, 2014

Daily update 10/28

The pre-FED day gap up played out again.  There was quite a bit of panic buying at the end of the day.  The sharp V recovery continues.  Here is a look at the SPX daily chart.

SPX cleared the 50 SMA today.  Its not far up to the 2012 trend line now.  This 1985 level is where SPX ran into resistance over the summer.  Will the bulls be able to power through it?  The breadth was 78% positive.  Quite strong and unusually high this long off the low.  There were 187 new highs and 30 new lows.  The oil stocks were mostly positive today.  The new lows dropped off considerably so the elevated number yesterday was likely from the oil patch as I speculated.  The number of new highs made a significant improvement.  Will the bulls keep at it?  Lets see what the futures chart looks like.

The futures made it up to the top resistance line.  There was quite a bit of congestion from last summer between here and the high.  Will that provide resistance?  There is no single level that I can pinpoint up above.  It is the entire area from here to the high.  Here is a look at the current breadth chart.

The breadth has been super strong on this rally.  The McClellan oscillator in the bottom panel has been over 200 (yellow line).  The 10 DMA breadth line is actually the highest it has been since 2009.  Is the market launching off to new highs and beyond?  There sure are plenty of believers out there.  They had a round table going on this afternoon on CNBC.  Everybody was in agreement that the market would do well the rest of the year.  The FED will officially end QE tomorrow and the market won't care.  There is nothing to worry about until the FED actually raises rates next year.  That was the consensus view.  I guess we will see if they are right. I mentioned last night about how tricky this situation might be.  Here is a look at the 2007 top.  I think it will help explain the dilemma.

There were two sell offs below the 200 SMA in the second half of 2007.  Each of those sell offs was met with strong buying which pushed the McClellan oscillator over 200.  There was also another rally in early 2008 that did the same thing.  As you can see none of those buying waves were a launch to new highs and beyond.  We can't tell if this breadth thrust is the start of a new leg up in the market or not.  I have already outlined how the technical picture at the highs looked just like other conditions that preceded bear markets.  The big surge in bullish sentiment on this bounce is pretty suspicious.  In Dec. 2007 SPX got above the 50 SMA for several days, but failed to stay there.  So getting above that line a few days in this case is not an all clear.  What really needs to happen is that all the major indexes need to make new highs and that includes IWM.

Am I the only one wondering who was committing a bunch of new money the day before the FED ends QE.  The biggest corrections in this bull market came after QE1 and QE2 ended.  Now maybe that does not happen again, but don't you think it warrants just a tad bit of caution.  The market has now come quite a ways since the low without looking back.  A sell the news reaction tomorrow would not be surprising.  I think a close below the 50 DMA now might be trouble for the market.  This move up looks like it might be too good to be true.  We need to watch carefully what happens here.


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