Bulls Remain in the Saddle

07/29/2009 11:30 am EST

Focus: MARKETS

Mark Leibovit

Chief Market Strategist, VRTrader.com

Mark Leibovit, chief market strategist for VRTrader.com says the market may be overbought, but the momentum is with the bulls as key indexes hit recent highs.

I believe strongly that the market will overall move higher [because of] the huge bullish reverse head-and-shoulders pattern in the major stock indexes, along with the recent breakout in the Nasdaq Composite index and the Dow Jones Transportation Average.

The Dow Jones Industrial Average, Standard & Poor’s 500 index, NYSE Composite, Russell 2000, and S&P 400 all made new recovery highs Monday, with the broad-based NYSE Composite (+0.43%) and higher-risk Russell 2000 (+0.44%) outperforming. The price and volume patterns are not yet flashing any warning signs of an impending reversal.

So far in this amazing month of July, the Russell 2000 is up 8.38%, the Dow is up 7.83%, the Nasdaq Composite is up 7.24%, and the S&P 500 is up 6.84%.

The Dow Transports outperformed with a gain of 34.54, or 0.98%, Monday to close at 3571.02, pushing further into new recovery high territory. The Transports have rallied over 10% since breaking through [their] 50- and 200-day moving averages less than two weeks ago.

Now that the Dow Transports are at recovery highs, all the major indices are giving bullish signals. I would not recommend backing up the truck as this rally may have been too much too quickly; I would be more interested in buying on a pullback, maybe to the 50-day moving average (at 3243 for the Transports, according to Yahoo! Finance—Editor).

We could see a correction in the market, and the old highs (956.23 on the S&P, 8877.93 on the DJIA, 1879.92 on the Nasdaq, and 3458.23 on the DJTA) should act as support. So far, the market is holding up well, but I'm sure the bears will try again. Should support fail, the bears could be back in charge. But for now, as long as we stay over support and the moving averages, one has to trade with the bulls. And, if we get a correction, my thought is it will be temporary.

We're overbought, extended, and euphoric, but except for a retracement to recent breakout levels and especially with a view to end-of-month “window dressing” ahead, it's tough to imagine any significant sell-off emerging here. Seasonally, however, there is risk into September/October, so the party can't go on all night with some rest, [but] I am content to remain long.

Perhaps after the first of August, we may begin see a nice correction, but again temporary!

The large head-and-shoulders bottom pattern traced out on the weekly charts in the indices had their necklines broken to the upside last week. This projects an upside target of roughly 1230 on the S&P, which is in the same area as the 62% retracement level of the entire bear market decline. The upside target for the Dow is 11,300, which is also the 62% retracement of its bear market decline.

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