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In focus: Inflection point

By Lawrence G. McMillan

The stock market staged a strong rally on Tuesday. Was it just a “Turnaround Tuesday” — a reaction to an oversold condition that had developed via the heavy selling of last week — or was it a true change of sentiment from bearish to bullish? To answer that question, we can look to our technical indicators, for several of them are right on the brink of turning bullish. The bulls actually had a strong chance to effect that change today, and they did not. That might bode poorly for the bullish case, but the actual definitive data is not yet in.

The Standard & Poors 500 Index has a chart that an optimist will interpret as bullish, while someone less optimistic would interpret it as neutral. From the chart below, the horizontal lines at 1260 and 1360 (roughly) determine the trading range philosophy. However, most recently, the 20-day moving average has begun to rise, and the strong late-June rally pushed indicators into bullish status. So far, the pullback in July has not violated the 20-day moving average on a closing basis nor has it violated support at 1300. In addition, Monday’s low was 1295, so the 1295-1300 area can be considered as support. A close below there would be bearish, while a close above 1355 would create a very bullish pattern of higher highs and higher lows.

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