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Has stock market rally run its course?
Posted By Prieur du Plessis On April 21, 2009 @ 7:22 am In BP Cafe,Markets,Think Tank | Comments Disabled
I highlighted the short-term overbought nature of the stock market in my “Words from the Wise ” review two days ago, saying:
Not surprisingly, investors’ lingering worries about the financial sector resurfaced yesterday, pulling the S&P 500 Index down by 4.3% and the Dow Jones Industrial Average by 3.6% – the worst losses since early March and in all likelihood a so-called 90% down-day .
While the short-term movements play themselves out, it is important to remember that the longer-term charts have not yet signalled a secular uptrend. Using monthly data, the graph below shows the multi-year trend of the S&P 500 Index (green line) together with a simple 12-month rate of change  (or momentum ) indicator (red line). Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1990, 1994, 2000 to 2003, and again since December 2007. Having said that, the level of the indicator is grossly oversold, as confirmed by the RSI  indicator (blue line).
The stock market will tell its own story over the next few days, but it is crucial that the lows of March 9 hold in order for base formation development to remain intact. Should these levels – 677 for the S&P 500 and 6,547 for the Dow Jones – be breached, it’s “Katie, bar the door” (quoting from Richard Russell ).
Article printed from The Big Picture: http://www.ritholtz.com/blog
URL to article: http://www.ritholtz.com/blog/2009/04/has-stock-market-rally-run-its-course/
URLs in this post:
 Has stock market rally run its course?: http://www.ritholtz.com/blog”http://www.investmentpostcards.com/2009/04/21/has-stock-market-rally-run-its-course/”
 Words from the Wise: http://www.investmentpostcards.com/2009/04/19/words-from-the-investment-wise-for-the-week-that-was-april-13-%E2%80%93-19-2009/
 chart: http://stockcharts.com/h-sc/ui?s=$SPXA50R&p=D&yr=2&mn=0&dy=0&id=p08595248465
 90% down-day: http://www.lowrysreports.com/samples/90.pdf
 rate of change: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:rate_of_change_roc_a
 RSI: http://stockcharts.com/school/doku.php?id=chart_school:glossary_r#relativestrengthindex
 Richard Russell: http://www.dowtheoryletters.com/
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