Buy Signal Confirmed

davidino

Buy Signal Confirmed
by Carl Swenlin
April 9, 2009  Last week I pointed out that the market was beginning to show the signs of a bullish undercurrent. Specifically, short-term overbought conditions were being cleared by small corrections or small pauses in the up trend. This week the bullish undercurrent persisted and may even be strengthening. Thursday's strong rally on expanding volume certainly suggests that this is so.  On March 17 our primary mechanical model for the S&P 500 Index generated a new buy signal. At one point I emphasized that the buy signal should be viewed as short-term until further confirmation materialized. On Thursday confirmation occurred when the S&P 500 20-EMA crossed up through the 50-EMA, so now we can assume that the buy signal applies to the medium term, and that the rally is likely to extend for several more weeks. At this point a sharp price reversal can quickly reverse the EMA crossover, but the odds favor positive outcomes.

There will be some concern that medium-term indicators, such as those in the chart below, are becoming overbought and could be warning of a price top close at hand. Since the market is now officially bullish for the medium term, I don't think we should worry when medium-term indicators become overbought. Such conditions can be relieved even as prices move higher.

Many will be assuming that this is the beginning of a new bull market, but it is too early to make such an assumption. The S&P 500 50-EMA is still well below the 200-EMA, so we are still in a bear market. The most optimistic we can be about the current rally is that it is a bear market rally.  Bottom Line: The market continues to behave in a bullish way, and a short-term buy signal has been upgraded to a medium-term buy signal. It is possible that it is the beginning of a new bull market, but the technical evidence says that this is only a bear market rally.

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