The bulls are still in control

I am hearing loud assertions from both extremes -- that we have entered a bear market, and the opposing view, that we have begun another major bull market up leg. In my opinion, neither view is correct; however, the bulls are still clearly in control.

Looking at our first chart we can see that the S&P 500 has decisively broken up through the top of the declining trend channel that has defined the recent correction. Equally important, key timing model components are on the verge of generating a new buy signal. Specifically, the PMO (Price Momentum Oscillator) has recently crossed up through its green moving average line, and the Percent Buy Index (PBI) is about to do the same. Once the buy signal is generated, my market posture for stocks would change from neutral to bullish.

(Editor's Note: Complete descriptions of the Thrust/Trend timing model and its components are available on the DecisionPoint.com website in the Glossary section.)

Another positive factor is that the S&P 500 has remained inside the rising trend channel that has dominated the pattern for about 30 months (see the second chart below). The price index will have to drop down through the bottom of this channel before we can claim that a bear market is in progress.

As for the "major bull market up leg" theory, there is no evidence that the current rally is destined to do any better than the other rallies in the 2004-2006 time frame, all of which were contained by the top of the rising trend channel. Not that it can't happen, but the recent correction did not create the kind of deeply oversold conditions that usually precede major bull market up legs.



Our second chart is a monthly bar chart of the S&P 500. It offers some small hope to the bears in that the monthly PMO has topped and has been falling for two months. This sign of long-term internal weakness is by no means conclusive, but it does raise some doubt as to whether the rally can be sustained.



Bottom Line: Medium-term oversold conditions and extreme bearish sentiment have turned the market upward before any serious technical damage was done by the correction. Our market posture remains neutral (as of Thursday's close) but our primary timing model is close to generating a buy signal. At this point my assumption is that the rally will continue, but that it only has modest potential.

Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a member of the Market Technicians Association.