More buy signals in place: Look for short-term correction before the next advance

By Lawrence G. McMillan

MORRISTOWN, N.J. (MarketWatch) — After Federal Reserve Chairman Ben Bernanke’s speech last Friday, the market sold off rather sharply. But once that selling got out of the way, a strong bullish move took place, carrying the Standard & Poor’s 500 Index higher by more than 70 points in just over one full trading day.

The reversal in price is accompanied by positive reversals in many technical indicators as well. We therefore expect higher prices over the next couple of weeks, although it is likely that there will be a very short-term correction before the next advancing stage.

However, perhaps the most important indicator — the chart of the S&P 500 SPX  itself — is still in a bearish mode. However, we think that can be overcome, at least for a while. Thursday and Friday, the market advances were repelled when they reached the still-declining 20-day moving average of the S&P. Today, the index was able to punch through that moving average. In fact, it climbed into the resistance area at 1,200-1,210. Two weeks ago, SPX topped out there and fell back sharply. This time, however, it seems that it should be able to break through.

There is support on the SPX chart at 1,160, and below that at 1,120 — where the S&P either closed or had an intraday low (or both) on six separate occasions since Aug. 8. Later, if that level should be broken, it would be very bearish, but for now the momentum is upward, not downward.

The equity-only put-call ratios have been rising steadily for nearly a month now, and as such they are in a very oversold state. Buy signals are just now being confirmed for these ratios, and — given their seriously oversold condition — these buy signals have the potential to be strong ones...

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