Do Technicals Point Higher on Short-Term?

Economy Indicators vs. The Stock Market Technicals

The economic data of late continues to be mixed at best, but stocks are on the verge of breaking out to the upside. So why have we rallied over 8% in the last 3 weeks? We can point to the following reasons:

1. At the end of August, BULLISH longer-term investor sentiment readings from AAII Investor Sentiment collapsed to just about the absolute lows of the Bear Market cycle of March 2009. The lows registered on March 9^th wasa historic 18.9% BULLISH reading.
2. Of late we have seen some positive economic data come out of China and according to Chinese government officials, there are no concernsof their economy faltering.
3. Money has been flowing out of bonds and back into stocks as investors are seeking higher returns.
4. Investors might be anticipating a win by Republicans in the November elections; I referenced this in my last editorial.

Here at PSTL we don’t believe the fundamentals of the economy warrant significantly higher stock prices but we always say, we will respect the technicalsof the market and let them guide our decision making.

Let's remember that the prevalent "double dip" worries that were broadly discussed in August did not blow out the SPX 1040 level. This was a positive for stocks.

Weekly resistance comes in at the at the 1130 level. I have been conveying to our members that if we can get above the 200 day SMA by 2%, hold above it for a few week, this would confirm higher prices. If we see this develop it would not surprise us to see the April 2010 highs of SPX 1219.80 tested out in the fullness of time.

As of this past Friday’s close, September 17^th, 2010 both the RSI and Stochastics closed at overbought levels, 73 and 95, respectively. It would not surprise us at all to see some back and fill (backoff/consolidation) in the market before there was a meaningful attempt to break stocks out. In fact, it would be preferred and bullish to see this occur and even a pullback to the SPX 1090-1100 area would be fine.

Click image to enlarge the chart.

Respect The Technicals

While we may not think stocks should go higher nor might you based on fundamentals of the economy, I highly suggest you RESPECT the technicals. By doing this, you will keep yourself out of trouble and stay on the correct side. Regardless of your market outlook, be sure you always use proper risk/reward ratios and proper stop management. Remember one thing, the market can confound you longer than you can stay solvent.

We will continue to keep a watchful eye on bonds, the dollar and the soaring gold market for clues of what's next.

Conclusion

Here at PSTL, we think stocks can work higher if we see a breakout and even challenge the April highs on the SPX. We still think from an economic stand point, the three D’s are in play: DEBT ISSUES, DEFLATION and DEPRESSION. Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this continued complex market environment.