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Market Trends - 1/4/2007

Generally, I believe it is best to begin with the big picture in mind and then work our way down to weekly and then daily views of the charts. Let's start with the long term view of the S&P 500. The relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. Notice that the 23 weekly RSI seems to be a good bull and bear indicator. In addition, the 65 weekly Exponential Moving Average (EMA) acts as support. We remain in a bull market though we seem to be nearing a near term top.

The resistance of May 8, 2006 high of 1327 was broken in September.  The weekly S&P 500 below is in a bullish rising channel and has broken through resistance at the upper trend line of the rising channel. RSI is just below 70, with any move down a sign of a pull back. I believe a  pull back is possible, which is good given the overbought situation we have. Also, the market needs to consolidate, so it has room to run further in 2007. The the MACD is not showing negative divergence, though the MACD histogram is showing negative divergence, indicating a pull back may be near.

The daily S&P 500 chart below shows several indications that we remain in a nice move up with the 50 day moving average acting as support. The RSI has remained above 50 throughout the move up since August 2006. As a result it is now acting as support on any move down. Negative divergence has shown up on the MACD indicating a pull back may begin in the near future. However, for now everything still seems to be positive for the market.

Given this perspective, we are still in a strong up trend though a mild pullback toward support levels, may be near. For now I am bullish, though I need to be ready for a pull back should it begin. I expect any pull back to be mild. As a result I will be partially invested keeping cash available for good buying opportunities.

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