Each weekend, I study market behavior using sentiment and technical indicators. The goal is to use clues, observation, and indicators to determine if we are in a bullish, bearish, or sideways market environment.
RELEASED: Understanding Options (McGraw-Hill, 2E), Understanding Stocks (McGraw-Hill, 2E), Start Day Trading Now (Adams Media), and Predict the Next Bull or Bear Market and Win (Adams Media): http://bit.ly/1bl0ZNk
AAII survey (10/29/2014)
49.4% Bullish. 21.1% Bearish.
Bearish: If sentiment is over 50% bullish.
Bullish: If sentiment is over 50% bearish.
Investors Intelligence (10/29/2014)
47.0% Bullish. 16.3% Bearish
Bearish: If sentiment is over 60% bullish.
Bullish: If sentiment is over 60% bearish.
VIX: 14.03 (on 10/31/2014)
Bearish: Less than or near 12.
Bullish: Greater than or near 40.
Moving Averages (daily): The S&P is above its 50-day, 100-day, and 200-day moving averages and pointing up.
Bearish (Short-term Downtrend): Index crosses below 50-, 100-, or 200-day MA.
Bullish (Short-term Uptrend): Index crosses over 50-day, 100-day, and 200-day MA.
MACD (S&P 500): MACD is even with its zero line, but above its red 9-day signal line and pointing up. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)
Bearish: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.
Bullish: MACD line crosses above 9-day signal line. MACD line crosses above zero line.
RSI (S&P 500): RSI is at 42.47 (on 10/31/2014)
Overbought (i.e. Bearish): When RSI rises to 70 or above.
Oversold (i.e. Bullish): When RSI falls to 30 or below.
Note: RSI can remain overbought or oversold for extended time periods.
Bonds: U.S. 10-year yield is at 2.34% (on 10/31/2014)
Note: 3.0% or higher is significant (consider selling bond funds as yield rises). 3.5% or higher and risk increases (for bondholders).
Analysis: Sentiment has increased along with the indexes. Although not completely in the danger zone, sentiment is getting frothy again. The VIX reflects complacency (again). The uptrend seems intact as the indexes rose back above their moving averages. This is an important week: If the indexes remain above their moving averages, the market is going higher. If not, it will be a rough ride. Note: Long term, I am looking at 1959 on the S&P 500 as the line in the sand. If it drops below that, look out below.
Opinion: As I mentioned last week, Dow 17,000 was a real possibility, and it happened, thanks to a big boost from the Bank of Japan. As a result, the market rallied on Friday (as well as on Thursday).
As I wrote in my latest column for MarketWatch (coming out this week), Friday’s rally was a head fake. It appeared strong but in fact there was little institutional support, breadth, or volume. Although amateurs might think it was a good day, in fact this market could run out of steam quickly.
As I’ve repeatedly said in the past, I believe this market is still too dangerous to enter.
Note: If you feel you must be long this market and can’t bear to miss out on any short-term rallies, consider buying call options (this is only for knowledgeable traders or those who read my book, Understanding Options 2E). Buying call options is speculation, and most speculators lose. Nevertheless, call options can be profitable if you are right about the timing and direction of the market or individual stocks.
Bottom line: It should be a volatile week because of the election, and second thoughts about the surprise BOJ announcement.
* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.