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Are Individual Investors Too Bullish?
08/14/2014 10:15 am EST
The current reversal in investor sentiment is consistent with a rebound in a downtrend and not the resumption of the major uptrend, so MoneyShow's Tom Aspray turns to the charts to see if individual investors have gotten too bullish too quickly in a still split market.
Stocks have continued higher from last Thursday's lows when the technical indicators suggested a rally was imminent. The Spyder Trust (SPY) has rallied 2.2% from the lows, which has taken it back to initial resistance.
In last week's comments (Are the Fear Levels Really That High?) I discussed the extremely low reading of CNN's Fear & Greed Index which has dropped to 4. Since the Index ranges from 0 to 100 this was quite a low reading. As of Wednesday's close, the Index has risen slightly to 9.
This week's data on the individual investor data from AAII indicates they have gotten quite a bit more bullish in the past week. The bullish percentage jumped from 30.89% to 39.81% last week, while the number of bears dropped sharply from 38.23% to 26.96%.
This reversal in sentiment is consistent with a rebound in a downtrend and not the resumption of the major uptrend. There have been some positive signs as the A/D ratios were stronger than prices on both Monday and Wednesday. Also, there are signs that biotechnology (see iShares Nasdaq Biotechnology (IBB)), a key market leading sector, is close to completing its corrective pattern.
So what is an investor or trader to do?
Chart Analysis: After Monday's apparent rally failure in the NYSE Composite, Wednesday's action was a short-term positive.
- The 20-day EMA is at 10,798 with more important resistance in the 10,850 area (line a).
- A strong close above 11,015 would clearly be a short-term positive.
- The A/D came close to its longer-term support (line c) last week.
- The A/D line is back above its WMA but it still has key resistance at line b.
- This is the bearish divergence resistance that warned of the top in July.
- The McClellan oscillator broke its short-term downtrend, line e, last Friday.
- The longer-term resistance, line d, and the zero line have now been overcome.
- The monthly projected pivot support is at 10,599 with further in the 10,500 area.
The Spyder Trust (SPY) dropped into the support zone last week as it had a low of $190.55.
- This low was between the short-term 38.2% and 50% Fibonacci support levels from the April lows.
- The quarterly pivot at $191.24 continues to hold on a weekly closing basis.
- The S&P 500 A/D line has moved back above its WMA but still has important converging resistance at lines g and h.
- A strong move above this resistance is needed to signal that a new uptrend has begun.
- The daily on-balance volume (OBV) is acting weaker than the A/D line as it is just barely above its WMA.
- The OBV has key resistance still at line i.
- Wednesday's close was above the 20-day EMA but just below the monthly pivot at $195.04.
- The next band of resistance is in the $195.78 to $196.16 area.
- A strong close above the former uptrend, line f, at $197.60 would be positive.
What it Means: In reviewing a number of sectors and charts it is still clearly a split market.
Some have completed short-term top formations (3 Reasons To Sell) and could drop to new correction lows on the next market pullback.
The Powershares QQQ Trust (QQQ) is still acting stronger than the S&P 500 but the daily studies have not yet signaled that the correction is over.
I will be watching intra-day action closely for signs of a rally failure in the next three to five days, so keep an eye on my Twitter feed.
How to Profit: No new recommendation.
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