Following the March 25th rally, we wrote that we would be watching for a Reversal Confirmation Day. On April 2nd, we got our confirmation, suggestion to us that the reversal was likely to stick: a 1%+ increase in the major indexes on greater than average volume. The 30-year statistically correlated history of this indicator makes it hard to argue against this reversal, at least in the intermediate term.
This reconfirms our prior Bullish leanings. However, we never throw caution to the wind, so now we will be watching the following factors to determine how the markets may be positioning themselves over the next few weeks:
1) Resistance: The market has rallied back to supply: 2070 on the Nasdaq, 10,566 on the Dow, and SPX 1150; How stocks deal with this overhead supply will be quite telling as to when any further gains may be had;
2) Sentiment: has gotten ahead of itself. The VIX dropped to 15 today, a move of more than 33% from its March 22nd highs of 22.67; The Arms Index 10 day moving average is at 52 week lows, and has hit levels not seen since October 2002. Additionally, we see several oscillators – notably, the NYSE McClennan – as slightly overbought;
3) Market reaction to news: has been reassuring. Despite the worst week in Iraq since the Mission was declared Accomplished, the market’s reactions has been relatively mild. Furthermore, the political fallout for the President is as bad as its ever been. Yet none of these externalities have really hurt Mr. Market, which seems to have merely “shaken it off” and powered higher – an encouraging sign, in our view;
4) Retracement: Backing and filling the big Nasdaq gap up from the April 2nd confirmation date is as good a target as any – about 2019. On the SPX, we are watching the 1128 breakout levels, and on the Dow, 10,350. It is not that we suspect the indices will definitely hit these levels, but if they did, however, we would advise using them as additional entry points to build or initiate positions.
Our expectations for the near future are to see several attempts to get past overhead resistance, with none particularly successful. After unsuccessful attempts, and perhaps with a retracement to the support discussed above, we could see a successful move through these levels, perhaps to 52-week highs. If the market plays out with the scenario outlined here, we could revisit our thesis and generate new targets and levels for the next leg up. Meanwhile, maintain stop losses and protect profits.