The weekly and the monthly cycles topped in January; the high on the S&P 500 manifested on February 19th. The cycles bottomed on March 8th (monthly) and March 16th (weekly). The price low was on the 23rd.
The market signals confirm the low that the cycles had suggested. Lows consist of selling and buying thrusts. These are days in which 90% or more of the price, breadth or volume are concentrated in declining stocks or in rising stocks. It is a concentration of down thrusts and up thrusts that herald the low. In volume terms, we saw a 92% down day in the past week. In the current week, two up thrusts have manifested.
Sentiment is bullish. The smart money is giving a buy signal. The latest Commitments of Traders report reveals that smart-money hedgers are buying stocks. This number has hit a multi-year high in the Dow Jones Industrial Average. And, the stock/bond ratio has risen above -2. After such past developments, the S&P rallied significantly over the next two to three months.
Price signals are constructive. The S&P did break through the important 38.2% retracement level. The crossing of that line implies that the underlying situation has changed, and that the likelihood of a new low is remote. In fact, when a market retraces at least 30% of a decline, the odds that it will make a new low are small. This market has already done that.
The monthly cycle does not top until early July. The S&P is likely aiming at 2950-3100.
There is one certainty. The Federal Reserve has responded with an unprecedented flood of credit. This will filter through the markets and the economy leading to a renewed bout of speculation and higher prices. The ingredients of excess liquidity and excess pessimism are here.
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