Technical Talk: Balance bullish breadth with weak seasonal trends

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The comments below were provided by Kevin Lane of Fusion IQ.

Almost like a broken record, for the past two weeks we have proposed the idea that the market would keep working higher because investor sentiment was more cautious or doubting than embracing, suggesting that many investors still had not deployed a lot of capital.

Over the last several trading sessions this thesis has played out. However, what is even more encouraging now is this rally has started to broaden out more. Originally it was predominantly tech- and commodity-based names leading the charge; however, in the last few sessions the banks and the cyclicals have started to catch a bid again, as are the transports.

The recent breakout in the S&P 500 above the 960 level (green line) looks like it can now trade up to its next resistance level near 1,070 (orange dotted line). This resistance level also happens to coincide with the upper end of a rising bullish price channel (blue lines).

As mentioned above we don’t really see any resistance on the S&P 500 again until the 1,070 area. With investor sentiment by and large remaining cautious yet sideline liquidity and price momentum continuing to be strong, we believe there is a high probability the S&P 500 will touch 1,070 before seeing the recent breakout spot again near 960.

sp500-040809s

As the rally has accelerated more aggressively of late the total equity/index put-call ratio has slipped, suggesting more calls are being purchased than puts. This is not an overly bullish backdrop; however, it is a shorter-term indicator as opposed to a more secular indicator. Additionally AAII Bull

Sentiment also rose recently to a reading of 47% last week. While neither of these numbers is alarming just yet, as they continue to rise so does the probability of a pullback.

However, the overwhelmingly positive market breadth figures and bullish sideline liquidity trump sentiment for the time being and pullbacks remain buying opportunities until sideline cash dries up.

While bullish, we continue to try to balance the need to respect the historically weak seasonal trends that late summer typically brings about while at the same time being cognizant that market breadth remains extremely bullish regardless of the seasonal cycle.

For now, long and strong seems to be the best mantra.

Kevin Lane, Fusion IQ, August 3, 2009.

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