Friday, January 28, 2011

The S&P Rally Chugs On

Early indications suggest bears will finish the day in control, but bulls have the stronger hand. In my December piece I had concluded:

As for the current rally, while it may only have a couple more percentage points in the tank it may not collapse like a house of cards. Working in the bulls favour is a sizable cup-and-handle pattern with a projected upside target of around 1,392; a loss of 1,220 will kill the cup-and-handle.

On December 15th the S&P closed at 1,232 and today managed to test 1,302 at the early day high. It's still well off its projected target of 1,392 but is by no means dead-and-buried.

As of Thursday's close the S&P was 12.51% above its 200-day MA, 4.31% above its 50-day MA and 1.51% above its 20-day MA. This corresponded to approximately 16 different periods over the last 60 years.

When this was expressed in relative terms the picture remained very bullish across all time frames. The hashed-line represents the projection from December.

The solid blue line represents the mean projected return with the green/red lines representing the 95% confidence interval. The mean return has shifted higher from December, suggesting a more bullish outlook in the weeks and months ahead. The upper range band hasn't changed but there has been a substantial rise in the lower confidence interval band. This doesn't mean markets won't fall, all it suggests is any downside is likely to be brief in nature.

Even if you only looked at the three matches from 2003/04 (bear market) there is still a bullish bias at the year mark, with uncertainty running somewhere between 1 and 6 months from today.

Compared to last month's bear-derived projections this is still a substantial improvement on the 1-year outlook. It doesn't eliminate a likely 10%+ haircut in the first half of 2011, but it does suggest things will be more positive by year end. Such behaviour - if it comes to fruition - would fit with a cyclical bull market.

Going forward, we have new support for the rally at 1,260 with a cross of the 20-day MA a suitable alternative (use a Zignals Alert fixed price or price cross moving average to track). As for upside, keep the measured move target of 1,392 on the radar (which can also be set as a Zignals SMS Alert)

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