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5 Charts Bears Need to Chew On

Kevin Cook

After a big bounce in the stock market Thursday and Friday (well over 2 standard deviations for a two-day period using a VIX of 18), most economic and market bears are ready to give up.

And I include myself in that camp of carnivores having an existential crisis, especially since I believe that most of the time 'price precedes fundamentals.'

Despite the weak economic data and the deterioration in earnings and corporate outlooks, the bulls have had control of this market since the June bottom. It was their game to lose and they almost gave it away with three big sell-offs in the past 5 weeks.

But they just solidified their firm grip by making a last ditch effort and launching off of support near S&P 1330 Thursday, making highs not seen since early May. All the while, in the big cap indexes at least, it was a tale of higher highs and higher lows.

Now, the market will probably rest and consolidate for the last two days of July as players anticipate potential central bank rhetoric and actions from both the FOMC and the ECB on August 1st and 2nd.

So it's a good time to look at some price charts which describe what this market has overcome and accomplished to see if the bear case should be put to rest or not. Most of these snapshots were taken in the last half hour on Friday and not much has changed as the indexes closed near their highs.

This is the chart formation I showed two weeks ago in 3 Charts You Need to See. Then I said you could call this pattern a rising wedge or a bear flag, but regardless of the name, the bulls were still in charge.

I also said that as long as the bulls could defend 1330, then they had a good shot to trade to the top of the price channel near 1390, where new levels of resistance would come into play. Taking out 1375 finally and decisively after two previous failed attempts gives the bulls additional strength here.

This is the S&P 500 Equal Weight Index, which removes some of the distorting effects of mega-cap stocks on price. When I showed this chart two weeks ago, the 50-day (blue) and 200-day (green) moving averages had not yet made their 'death cross.' Also, in the mid-July rally (week of the 16th), the SPXEW went up and made a lower high in that rally.

Today, it has taken out that high, but still not the early July one. The one bit of good news here for this version of the index, which again displays more breadth than the conventional market-cap weighted one, is that it has gotten out from under its 200-day moving average. It was spending so much time below it that I thought for sure we were headed for a bear market.

Here we have the weakest look at the breadth of the US equity markets via the NYSE Composite Index. Note how this one had its bearish 'death cross' of the 50 and 200-day early in July. And it has spent more time and price below its 200-day moving average than any broad index.

Now, not only has the NYSE overtaken its 100-day moving average (red), it is threatening new highs in July. Will this reversal of fortune stick a fork in the bear case? We won't know until we see follow-through (or not) next week. But the final chart I want you to see is an internal look at the strength and weakness of the NYSE via a proprietary measure of institutional buying and selling that offers some clues about the recent trend.

This comes from a trading service called StockTiming.com, which offered this 'Accumulation or Distribution' view of Thursday's closing data as a courtesy. It is still useful without Friday's price and volume data because these trends persist and even if it reversed Friday, understanding how this indicator works provides important insight about the market.

The folks at StockTiming say their chart 'net's out the amount of Daily Buying and Selling by Institutional Investors. The value of this is that it tells you whether they are in Accumulation or Distribution.' Clearly, the big boys and girls have been in Distribution since the swing high of July 19.

While they will not share their proprietary indicator again for free until mid-August at the earliest, my guess is that it will show a reversal of the Distribution trend. Here's a close proxy with Friday's data using the Chaikin Money Flow indicator.

Conclusions: The bulls have achieved a big victory this week. For short-term traders who don't concern themselves with ideas about economic fundamentals, just following price and volume trends has paid off.

For those of us who do get hung up on fundamentals and wonder if price is acting as a leading or lagging indicator right now, we are watching two things: (1) how markets react to next week's central bank musings, and (2) if price resistance holds or if new highs are made.

Since the S&P is only 30-some points (2.5%) from new highs, it's a critical decision-time for an investor-trader like me who is long-term bullish (new all-time highs in 2013), but short-term bearish (new lows for 2012).

For now, I am going to hang on to my ideas and view this price move as one last gasp of the 2012 bull market. I figure the 3% of upside I might miss will a take a week or so to unfold and that will give me plenty of time to research and re-chew my stance.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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