The following technical analysis comes to us courtesy of Decision Point:
On Thursday our mechanical Thrust/Trend Model changed from a buy to neutral, based upon the 20-EMA crossing down through the 50-EMA. Now our hope is that there will be enough continuing decline to cover what may turn out to be a whipsaw signal. No guarantees in that regard, but bull markets typically do not end this cleanly.
The market sold off deeply on Friday, but in the end it rallied and closed up by a small amount. This looks like the beginning of a bounce of at least short-term duration.
The weekly-based chart of the S&P 500 shows that the PMO is very overbought and has crossed down through its 10-EMA. It could take a few months to clear this condition by bringing the PMO back to the zero line. This doesn’t mean that there must be a severe correction to accomplish this. Note how in February 2004 the PMO reached similar overbought levels, and how that condition was worked off by sideways (and slightly downward) consolidation.
While I don’t weight my cycle studies too heavily, it is worth mentioning that a 9-Month Cycle low is projected for the first part of April, and a 4-Year Cycle low is projected for later this year (July to October time frame). Viewed in this negative cycle context, the market could experience considerable difficulty for several months.
Bottom Line: The mechanical model has moved us to a neutral market posture. I worry about whipsaw when neutral signals generate coming off market highs, but the weekly PMO and the cycle context make me think that the correction has a way to go.
Source: Decision Point
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.