What’s Next For The S&P 500?

I called for an end to the rally on April 1.  I did so again on April 8.  Now over a month into the rally, and two weeks longer than I expected, we are still in rally mode.  I could dig in my heels and point out the bad signs in this market.  I could continue to be the Technician’s Eddie Mush.

I will not do that.  I mean I will tell you what I think, but I will not say that this rally is done.

Let’s go to the chart - and let’s get the negatives out of the way again:

• Prior resistance near 875 acted as the most recent high
• Volume is showing a down trend which means that traders could be tired and waiting for a pull back
• On Balance Volume has not made a new high

I thought I said I was not going to do that again.  OK, small fib.  What I will do, though it also point out some positives.

• While we have hit resistance, I also believe we might have an important support level based on the Volume by Price indicator.  I would like to see the 815 level tested and hold.
• The 200 Day Moving Average is back on the screen.  Psychologically this could be an important level to hit although we are still more than 10% below it.
• Volume, while fading, is more than the last rally at the end of last year.  Buyers are returning slowly but surely.

My thesis on earnings being the reason that the sellers take over is not bearing fruit.  Research In Motion (RIMM) was good.  Bank of America (BAC) was good.  Intel (INTC) wasn’t awful.  Goldman (GS) was good.  Let that be a lesson to you - don’t go to a technician for fundamental advice.  I read too many CNBC.com articles about the sure-to-be disappointing earnings and thought I would work that into my analysis.

Another story line that I could have borrowed from the financial media was the fear of being left out of the rally.  I think we’ve seen a bit of that.  The On Balance Volume shows us that the up days are higher in volume than the down days.  Traders are using the dips in this rally as buying opportunities.  They are using it as a way to get in on the bullish action. Traders and funds are judged against each other as well as against the market as a whole.  Those who were less on the sidelines on this rally are going to show a better performance than those who were more in cash.  These funds thrive on attracting new money and those with the better performance will do a better job attracting new clients when those clients start looking for places to invest.

Fear can take many forms.  It is not just the fear of losing money.  It can be the fear of not making enough hay while the sun is shining.

So what do I think is coming next?  Clearly the selloff has to be right around the corner, right?  Who knows?  I think there might not be a selloff if that support around 815 holds up.  There has been a lot of selling in the past 6 months.  It is possible that the worst is behind us.  I won’t predict one way or another - I’ll wait for the market to tell me.

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