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Saturday, May 21, 2005

Larry McMillan on the Stock Market



McMillan Market Commentary
Friday, May 20, 2005
The market has finally broken out to the upside -- overcoming resistance levels, the 50-day moving average, and breaking the existing downtrend line. This is very positive action on the charts of the major indices. There is modest resistance near Thursday's closing levels, but from our point of view, it looks like a challenge of the yearly highs will take place. This has been a difficult market to predict, in that the technical indicators have wavered back and forth while prices ignored support and resistance levels, to a great extent. However, this week, with the equity-only put-call ratios finally generating buy signals -- an event that coincided with the actual bottom -- action has taken on a distinctly bullish tone. We are inclined to think that prices are going higher.

All of our technical indicators are in agreement with this bullish move -- the first time all have been in agreement on the bullish side since late January. The equity-only put-call ratios had toyed with buy signals a couple of times, but in past weeks always made new highs. This time, however, they have snapped downward -- a clear and significant buy signal from both the standard (Figure 2) and weighted (Figure 3) ratios. Since these signals came from so high on their respective charts, we think they will be significant ones.

Market breadth hasn't been as reliable. While there were timely sell signals recently, these indicators never got oversold enough in the most recent decline to generate buy signals. Nevertheless, they are now quite overbought -- something that is actually desirable at the beginning of a new bullish breakout. Ideally, they will remain bullish for some time as the rally unfolds.

Finally, volatility ($VIX) has collapsed to its lowest prices in over a month. This is bullish, in that the recently-established uptrend in volatility seems to have been broken. While we expect the market to be volatile, and therefore don't expect to see $VIX back at the 11 level soon, we still regard these lower levels as bullish.

So, the bottom line is that all of our indicators are in bullish agreement. Usually, there is a good rally when that is the case. One might think that it's too late to buy -- that four days of fairly strong rally have already unfolded. But if you look at the action from last October-November (Figure 1), you will see that that rally kept up the pace for quite some time. There was plenty of room left after the first few days had passed.

To receive the complete commentary plus reccomendations visit here: http://www.optionstrategist.com/offers/strategist.htm

Note: Use the following link to view this week's charts: http://www.optionstrategist.com/products/advisories/hotline/charts.asp

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