Wednesday, April 8, 2009

Slow Momo

We’re seeing some slowing momo (read: momentum) in the current uptrend in the $SPX, implying that the strength of the uptrend is waning a bit.
The SPX staged a (1) big run, then less of a run (2), then even less of a run (3).

Given the huge run-up in the markets we’ve seen over the past month, it shouldn’t be surprising to see some slackening in the strength of the bulls. The fluid move down from 800 to 666 in the S&P 500 didn’t leave much overhead resistance- making it easy for the market to snap back from 666 to 800 +. However now that were around 825 + there is quite a bit of overhead resistance or supply that the market has to digest if it wants to make its way higher.
When the market approaches a resistance zone it typically results in some type of correction as the market absorbs the selling pressure; resulting in either a time correction (choppy sideways price action), or a price correction (deep retracement in price). What have we seen so far... price or time correction? Although we’ve seen some pretty big up and down days over the last few weeks, the reality is we haven’t really gained any ground. On March 23, the SPX closed at 823 – Today, 2 ½ weeks later, the SPX closed at 825.
Smells like time correction to me...

Now, this isn't to say the market can't work it's way higher- cause it very well may. We are entering earnings season and there's always the chance that companies knock their earnings out of the ball park, especially with some pretty low expectations already baked into the cake. However, the slowing momentum does temper my enthusiasm about allowing my overall portfolio to get too bullish at this stage in the game.

For those of you unfamiliar with measuring momentum here's a quick overview. Momentum can be defined as the distance between pivots. In an uptrend we assess the pivot highs, in a downtrend we look at the pivot lows. If the distance between pivots is increasing, the trend is increasing in momentum. Conversely, if the distance is decreasing, the trend is decreasing in momentum.

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