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Bullish Signs Emerging

Posted on March 12, 2009 by Adam

Over the past three days, I have started to notice some singals that have me bullish on stocks for once. I’ve been consistently saying that the market had been getting more and more oversold, which would likely result in a sharp rally. We got that rally on Tuesday, which has followed through nicely over the next few days.

I should say that I’m not calling a bottom to this market by any means. Long term, we stand a good chance of retesting the lows. However, in the intermediate term, I’m noticing a lot of signs that point to a wave of buying and the higher prices that come with it.

First off, the S&P 500 Bullish Percent went “Bull Alert” yesterday. Coming off the grossly oversold levels we had reached, I take this as a staunchly bullish sign. Bullish percent indicators tend to be very actionable, and I have found that they are rarely wrong.

Secondly, the S&P and the Dow went on buy signals yesterday. Those buy signals predict a price objective of at least 870 for the S&P, which would take us back up to the long term bearish trendline, which we have yet to test.

Not only did the averages go on buy signals, but they also completed a “bearish signal reversed” patter, which is one of the most bullish point and figure price patterns out there.

I’ve also noticed that the $VIX, or the market fear indicator, has broken down beneath support. I project that the $VIX could go as low as 30 as fear continues to leave the market and buying commences.

The VIX has broken beneath it's upward trending support line, indicating that fear is starting to leave the market and buyers are stepping in.

Finally, I’ve noticed a bullish divergance on longer term charts of the averages. On a weekly chart for the last 3 years of the S&P, the price has made lower lows, but the MACD is making higher lows - a classical bullish divergance.

A bullish divergance has developed on a longer term chart of the averages.

Alone, each of these signals is reliable, but together, I think we are starting to see something of a perfect storm come together in favor of higher stock prices. I know it won’t come in a straight line, but I am highly confident we will see an extended rally over the next weeks - maybe even months.

Happy Trading