Proceed With Caution

Source: http://feedproxy.google.com/~r/ContrarianProfits/~3/k48mGu1px60/16466
Posted on Monday, May 11th, 2009 | In Market Commentary, Stock Market

Contributed by: Rick Pendergraft (http://www.contrarianprofits.com) -

Well, so far this year the S&P and Nasdaq are both in positive territory, the S&P by a little and the Nasdaq by 10 percent. It has been a strange path to get to this positive territory with a huge drop in January and February and then a monstrous rally since then.

In fact, the rally appears to be overdone. We have jumped too much, too fast. Looking at the chart of the S&P 500, the daily stochastics have reached their highest level in two years thanks to this rally.

A closer look shows three significant hurdles for the S&P to overcome in the immediate future:

The 200-day moving average is in the 958 range
The downward-sloped trendline is sitting just above the 200-day
The high from January- 943.85

Combining the three levels of resistance and the overbought state (both on the daily chart and the weekly chart), there is little chance of the S&P breaking through the resistance in the immediate future.

While I still think 2009 will be a positive year, a decent pullback will be healthy for the market. The monthly chart shows that we are barely out of oversold territory. We are still 100 points below the 12-month moving average that I have talked about using to time your asset allocations.

If you are a short-term trader and have reaped the benefits of this massive rally, I suggest you take some money off the table. If you are a long-term investor, I suggest you wait before committing any additional funds to equities.

A move back down to the 800 level and some sideways movement for a month or two would give the 12-month moving average time to catch up and then we could potentially see the 6-month moving average cross back above the 12-month. And that is when you will know for certain that the bear market is over.

Source: Proceed With Caution