Stage Is Set for More Up Moves

04/28/2008 12:00 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of the Chartist, believes we're in a long-term bear market, but says stocks may move higher in the next few weeks.

Since last recording bull market highs, the benchmark Standard & Poor's 500, Dow Jones Industrial Average, Russell 2000, Wilshire 5000, [and] the Nasdaq Composite index have continued to trace out a pattern of descending peaks.

The intermittent rallies have been impressive, but thus far, overhead resistance has held the majority of indexes in check. (The Dow and the S&P have topped resistance levels, by some measures-Editor.)

The S&P has successfully retested its January intraday lows at 1,270. The moment of truth took place on March 17th, when the S&P fell under the January lows on an intraday basis only to rally back and close out the session at 1,276. The follow-through since that date has been impressive, with the S&P 500 moving back above its 50-day moving average in the process. The Dow is exhibiting similar characteristics.

[There have] been three days in which upside volume exceeded downside volume by better than nine to one since early March. The up-volume indicator discovered by Lowry's Reports and popularized by Marty Zweig has been around a long time. It was Zweig's contention that it was highly bullish when upside volume exceeded downside volume by 90%.

The first nine-to-one "up" day was on March 11th with the Dow surging 416 points. This was followed by a 90% down day on March 14th when the Dow lost 194 points. However, the next two nine-to-one up days were highly bullish, with up-volume exceeding down-volume by 19 to one on March 18th and ten to one on April 1st.

The stage is set for more upside action. According to Investors Intelligence, the percentage of bears among investment advisors has exceeded bulls for six weeks in a row. But more important, the number of bulls dropped all the way down to 30.9% on March 18th, the lowest level since late 2002, while the number of bears jumped to 44.7%, a multiyear high. The last time the number of bears exceeded 44.7% was on September 18, 1998.

Technical analysts are often focused on the last bear market. In the previous bear market, the Nasdaq rallied on no less than four occasions, posting gains of 33%, 39%, 44%, and 18%. All of the rallies ended badly. 

Could a rerun be in the cards? We seriously doubt it, because the last bear market entailed the unwinding of the Internet bubble, in which stocks were bid up out of all proportions.
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Technically we are in a bear market, and the place to be is in cash or equivalent, which is currently our posture. Our models, although improving, are still in a bearish mode. Having said that, the near term looks quite favorable. The number of shares sold short has risen by 60% over the last 16 months with the short-interest ratio at a multiyear high. The shorts will soon be put to the test, and when they start to cover, they will add a considerable amount of fuel to the rally.

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