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The stock market is pausing and many are saying that this is a top and the end of the recent bull market. Is it? Looking at some of the economic indicators gives us a mixed picture. The yield curve is inverted, the economy is slowing, earnings growth is expected to be in the high single digits, down from many quarters of double digit growth and housing continues to be in the doldrums. On the other hand the economy is still growing, job growth is strong and inflation seems to be holding in the 2.6% area, slightly above the Fed’s target. So it is hard to tell which way the market will go from the economic news. No wonder we read and hear from forecasters that say on the one hand the market is at a top, heading down, and on the other hand it is just pausing. Maybe a look at some charts will give us a better perspective. The chart below is a one year chart of the S&P 500. It shows a pause in the bull market, but it does not yet indicate a pull back is underway. However, if the 50 day moving average were to be broken, it is likely we will see at least a move down to the 1325 area. Note the MACD is showing negative divergence, which is an indication of a pull back in the near future.
The chart below is the weekly S&P 500. It shows we have been in a long term up cycle characterized by the 22 month channel. This channel was broken to the upside and it will now act as support in the future. There are signs of a pull back with the RSI above 70 and moving down, MACD might be peaking and the MACD histogram shows negative divergence. Should a pull back take place we still have support at the 1325 area and the 50 week moving average is in the same area.
The NASDAQ moves more quickly and might lead the market down. The chart below is the 1 year chart of the NASDAQ. The RSI and MACD both are indicating a pull back is in the near future. There is support at the 50 day moving average and a possible up trend. Key support is in the 2375 area.
Looking at these charts indicates the market is definitely pausing. Any further move down would likely confirm a pull back is underway and we have put in a top for the time being. However, if the market continues to move sideways, then it may just be a pause. Like any good trader and investor, now is the time to be flexible and ready to go which ever way the market takes us. © 2007
Hans Wagner As a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market. Feel free to visit the site at http://www.tradingonlinemarkets.com/ CONTACT
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