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Market Trends - 4/2/2007

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. It recently fell through 50 indicating the current up trend is over. This pull back is a positive sign as the market needed to consolidate its earlier gains. Once this action is complete and we have reached a near term bottom, I expect the market to resume its move back up.

Notice in the 1 year chart of the S&P 500 below that the recent top was a 3rd wave market top within a larger 5-wave uptrend. This means that the current pullback is simply a 4th wave correction and not the start of a new major downtrend.

Also, 4th wave pullbacks consist of waves A, B, and C. The good news is that the initial wave A correction is complete and the S&P is now in the midst of a B wave oversold bounce. However, as you can also see, this wave B bounce looks to be over and then we can expect the final wave C correction to new 2007 lows.

Wave B oversold bounces generally retrace about 50% of wave A on average The 50% retrenchment of wave A would be 1417 for the S&P 500 my upper target on this oversold bounce. However the market went through this level and turned down at the 1440 level. Not to worry, as it looks like the C down wave is underway.

One way to look at the final wave C correction will probably take the S&P, and the other major indexes, down to test their 200-day moving averages at a minimum. Also, a 50% retrenchment from the July lows to the February highs would be another price target. This is shown in the S&P 500 chart below. Then the current downward move could end at the 1370 area, where the last short term low ended and very close to the 38% Fib level. In any case each of these levels bears watching. also, this indecision makes shorting this market more difficult as we are still in a major uptrend.

Given this perspective, we are still in an up trend that is experiencing a consolidation. I am looking for good companies that are trading lower, especially those that have held up well in the recent pull back. I also am looking for stocks that are trading near their key support levels. Look to buy when the pull back is over.

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