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Market Trends - 10/3/2006

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 monthly view of the S&P 500. The relative Strength Index (RSI) seems to be a good indicator of the cyclical bull and bear markets. Also, the 20 month moving average seems to act as support. So what does this tell us? Well, so far we have not transitioned from a cyclical bull market to a cyclical bear market. And this might be a buying opportunity for stocks at or very close to their support levels.

The weekly chart below shows the same bull and bear phases as the monthly chart above. Of particular interest is whether the current technical pattern is a rising wedge, which is bearish or a rising channel which is bullish as long as it continues. For now is is best to assume we remain in a bull market.

Next, let's look at another weekly chart of the S&P 500. Notice that the 23 weekly RSI seems to be a good bull and bear indicator. In addition, the 65 weekly Exponential Moving Average (EMA) at 1244 also acts as support indicating is it holds this level is a good place to buy. We remain in a bull market.

The resistance of May 8, 2006 high of 1327 was broken in September.  Presently we are seeing either a rising wedge or a rising channel. A break below the lower trend would likely indicate a pull back. Also, note the 50 moving average crossed up through the 200 moving average which is a positive. Also we seem to have negative divergence on the MACD histogram indicating a pull back is in the near future. Buying near support levels are still the way to go. However, we need to be ready to sell quickly if the support levels fail. Keep our stops in place.

Based on this brief review of the S&P 500 charts, I will look to buy stocks that are at or near support levels. I will also begin to look for short opportunities including the Rydex inverse funds that offer 2 times down side leverage and various ETFs such as QID, should these support levels fail.

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