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Market Trends - 5/4/2007

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 are experiencing a pull back toward support. This should present new buying opportunities.

The daily S&P 500 chart below is one of a number our Premium Members see each week. RSI had remained above 50 throughout the move up since August 2006.

The breakout from the ascending triangle is a positive sign. Also, the positive divergence on the MACD is another sign of an up trend. Strong volume is a positive sign, weak or declining volume a sign of a pull back. Notice the volume is tapering off the last week. Logically this makes sense, since it takes buying volume to overcome those selling.  We could also see a test of the horizontal breakout line in the near future. If this occurs, then we will use it as a buying opportunity.

The chart below is from chartoftheday.com. It shows that the current stock market rally as defined by the DJIA is the fourth longest since 1990, yet it is below average in size of move up. One interpretation of this chart is we are due for a move up to bring the current rally closer to the norm. Another is we are nearing the end of this current bull market.

Given this perspective, we are still in an up trend. However, it cannot keep going up each day. The market will revert to the mean. For now it looks like we could be seeing the first signs of a move down or at least some consolidation. This should present us with some good buying opportunities. I am looking for good companies that are trading near their key support levels.

Also, we will need to evaluate our current long positions to see if we should hold them or close them out and then buy back at a lower price. For now I like all of our positions and plan to continue to hold them.

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