Very Bullish Indicator On The S&P 500 Chart

Last week’s article was titled Hoping for a Pullback because plenty of people did not catch the beginning of the current rally. The problem with being in the position of hoping for the market to give us a break is that the market doesn’t usually fulfill our hopes. This appears to be one of those times.

Instead of showing any inclination to correct recent gains, the market is instead trying to break up through the top of the ascending wedge formation, which is the dominant feature on the daily S&P 500 (^GSPC) chart. If the breakout is successful, it would be most unusual (and bullish) because the ascending wedge usually resolves to the downside.

Also last week, I expressed some concern regarding how overbought many of our medium-term indicators had become; however, in a bull market this is not a serious issue because bull markets often to correct internally while prices move higher. As the market moved higher this week, my partner (and daughter), Erin, pointed out that the SPX ITBM (Intermediate-Term Breadth Momentum Oscillator) might be making new record highs. As a result, I looked at the long-term chart below and realized that the ITBM was at its highest level in the 10 years we have been collecting data for the indicator.

More important, I could see that the last time the ITBM reached these levels was when a new bull market was launching off the 2003 price lows. As you can see, there is a great deal of similarity between the two events. In 2002-2003 the market made a triple bottom over a period of about nine months.

In the last nine months the market has completed a reverse head and shoulders, and has broken decisively above the neckline.

Are we getting confirmation from other indicators? Yes, the charts are pretty much unanimous. Another example is the Percentage of Stocks Above Their 200-EMAs, a price-based indicator. You can see below that there is a strong surge similar to that on the breadth-based ITBM chart.

Bottom Line: The very high reading of the ITBM, along with the recent price breakout, presents strong evidence that an initial impulse capable of launching another major up leg has taken place. And the similarity between the present and the 2002-2003 bottom, leads me to believe that it is more likely that we are at the beginning of a bull market rather than at the end of one.

Whenever I make bullish comments, and this is as bullish as I have been since the March lows, I get mail asking me how I can be bullish in the face of the dismal fundamentals we are facing. The answer is that I let the charts tell their story and pretty much ignore the fundamentals. If I had to guess why prices are bucking the fundamentals, it is probably nothing more complicated than prices reacting to the huge amount of liquidity that has been (and will be) dumped into the economy.

Do I think that this bull market will be similar to the last one in length and amplitude? Technically speaking, I think the potential is there, but I don’t want to say that is my forecast. My next target is 1200 on the S&P 500.

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