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Oversold Conditions May Fuel Rally, Market Awaits Fed Comments

  • Written by Syndicated Publisher No Comments Comments
    January 29, 2014

    The Fed has started to taper off of the $85 billion in monthly bond purchases at a rate of $10 billion per month. During this month’s policy meeting they will decide whether to stick to the plan and increase the taper by another $10 billion, or slow down the rate of taper. Their decision will be announced Wednesday at 2:00 p.m. ET.

    Stocks: Based upon a 9/18/2013 Thrust/Trend Model buy signal, our current intermediate-term market posture for the S&P 500 is bullish. The Trend Model, which informs our long-term outlook, is on a buy signal as of 9/9/2013, so our long-term posture is bullish.

    There was a small oversold bounce on Tuesday, which I interpret as being the beginning of a right shoulder. Please understand that I see the head and shoulders outcome as a strong possibility, but it is not a prediction, per se. A lot can happen between now and the completion of the right shoulder, and I am prepared to abandon this assessment with no regrets, but it has merit at this point.

    Screen shot 2014-01-28 at 1.32.17 PM

    Ultra-Short-Term Indicators: They became very oversold and there is evidence that internals are reversing, confirming the price bottom.

    Screen shot 2014-01-28 at 2.06.42 PM

    Short-Term Indicators: Oversold, ticking up, prepared to fuel a rally.

    spx stvo 28 jan 2014

    Intermediate-Term Indicators: Not nearly oversold enough historically, but they are oversold relative to the indicator range in the last six months.

    Screen shot 2014-01-28 at 2.07.38 PM

    Conclusion: While I would welcome a continuation of the correction (we really need to flush some of the excess out of the system), the indicators are poised to support another rally. This fits nicely with my head and shoulders scenario, but it could be more robust than that; however, if the market bias has truly turned bearish, the indicators can also accommodate a break down through support, that would be a whole new ball game. The Fed comments Wednesday could kick it either way.

    Dollar: As of 1/16/2014 the US Dollar Index ETF (UUP) is on a Trend Model buy signal. The LT Trend Model, which informs our long-term outlook, is on a sell signal as of 8/13/2013, so our long-term posture is bearish.

    Unless UUP gets back above the 20- and 50-EMAs tomorrow the Trend Model will change from buy to sell.

    Screen shot 2014-01-28 at 1.31.37 PM

    Gold: As of 9/24/2013 Gold is on a Trend Model sell signal. The LT Trend Model, which informs our long-term outlook, is on a sell signal as of 2/15/2013, so our long-term posture is bearish.

    Gold slipped down slightly below the declining tops line support.

    Screen shot 2014-01-28 at 1.31.10 PM

    Bonds (TLT): As of 1/17/2014 The 20+ Year T-Bonds ETF (TLT) is on a Trend Model buy signal. The LT Trend Model, which informs our long-term outlook, is on a sell signal as of 5/29/2013, so our long-term posture is bearish.

    TLT is backing away from overhead resistance. I assume that is in preparation to breaking through it.

    Screen shot 2014-01-28 at 1.30.39 PM

    The above content was an excerpt from the January 28, 2014 blog for Decision Point subscribers. Click here for a free trial.

    Images: Flickr (licence attribution)

    About The Author – Carl Swenlin, Decision Point

    Carl SwenlinCarl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.
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