The market has settled over the trading range and seems to have Sp1174 in its sights. In a Fractal Finance view, by closing above the trading range (1130-1150) and staying above, the odds are favoring a continued bullish break up. The 1174 level is an important one, since it represents the 'fourth of the prior third' (the big bounce right after the flash crash went all the way back to 1174). Tonight's STU notes how this is the most common retracement level. This level is also the 78% retrace if we count from the July low (it is 1181 if we count from the May25 low). The 78% retrace is the last line of defense for the bears. Above the 1174-81 levels, and it is difficult to maintain a bearish posture under wave theory.
Sentiment readings are not supporting the rally, such as the 5-day S&P A/D ratio (discussed in the STU). Perhaps the most interesting breadth reading comes from Traders Narrative, which noted yesterday how the number of S&P stocks above their 50 DMA is nearing the levels of prior tops. This metric began to pop up across the blog sites today. EvilSpeculator has tracked this indicator, and discussed it on Sunday, concluding "we have not been this overbought in years." Here is the chart:
Now, in a thrust up sentiment levels can remain extreme for a while, so hitting such levels is not suggesting a quick reversal. It does suggest, however, that when the reversal comes, it will be sharp and unmistakable.
The focus is now to the unemployment report on Friday. The STU notes an interesting win-win argument floating around:
- if unemployment is lower, it suggests a recovery, and is bullish
- if unemployment is worse, it suggests the Fed will be more aggressive with QE2
When fundamentalists win both sides of the argument, contrarians get ready to fade their position. Put more prosaically, if the market anticipates the win-win, it will rise on the rumor. So sell on the news.
Final item is to watch the USD. It continues to sink in the Dollar Index, down to 77.3 today and closing under 77.5, with only 4% bulls. The Euro is approaching $1.40 with only 3% bears. The STU notes that the 'fourth of the prior third' level is $1.403. The next stopping point for the DX may be the lower trendline from the lows in March 2008 (Bear Stearns!) and November 2009, which is around DX76 (yesterday's chart courtesy Contrarian Advisor):