Stock markets – is uptrend still intact?

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“I take the action of the stock and bond markets this week (and particularly today) very seriously. Extreme caution is advised. The primary trend of the market is bearish, and the secondary trend may now be turning down,” said Richard Russell (Dow Theory Letters) on Friday.

After equities’ seven month climb, stock markets certainly look vulnerable for a decline. Two downside reversal days – on Wednesday and Friday – would seem to indicate that stocks could commence a pullback to work off the overbought condition, allowing fundamentals to reassert themselves.

Bill King (The King Report) reported Art Cashin as saying that since June 2007 the Daily Sentiment Index (as published by Trade-Futures.com), which polls futures traders, has reported more than 90% bulls on the S&P only once. “When would you guess that time to be? July 2007? October 2007? Wrong. It was last month … optimism has soared, from 2% bulls in March to 92% bulls in September. The latest reading is 90% bulls.”

The major moving-average levels for the benchmark US indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Dow Jones Transportation Index, which is trading marginally below its 50-day moving average, all the indices are still holding above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.

The October lows are also given in the table as a break below these levels would indicate a reversal of the uptrend since March, i.e. reversing the progression of higher reaction lows.

Click here or on the table below for a larger image.

25-10-09-011

Still from a technical perspective, Adam Hewison (INO.com) sounded a cautious note on the Nasdaq Composite Index as explained in one of his popular technical analysis presentations. Click here to access the presentation. (The analysis was done on Tuesday, but is still as relevant today as it was a few days ago.)

Lowry’s Buying Power Index has been declining over the past few days, indicating that buying power might have exhausted itself and that short-term advances have been capped. With the Federal Reserve Board scheduled to end its quantitative easing program net Friday, I will bide my time while the fundamentals play catch-up. Meanwhile, caution remains the word.

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