The stock market has now pulled back for five straight days. This came after a strong upside breakout.
On the surface, it is disappointing that the upside breakout momentum faded and gave way to this decline. However, the market was very overbought a week ago, and it was inevitable that a decline was to take place to alleviate that overbought condition. It is our viewpoint that this pullback is a healthy one, and it will lead to higher prices soon — certainly over the intermediate term.
The chart of the Standard & Poor’s 500 Index SPX -0.98% clearly has a pattern of higher highs and higher lows (see chart below), and that is positive. The five-day pullback has retraced to the bottom of the rising channel on the chart. SPX has made lows in the support area of 1,330-1,340 this week, and as long as that level holds, the bulls are still in charge. There is also support at 1,310, which — if violated — would put an end to our bullish thoughts…
In summary, the overbought conditions of a week ago are but a memory now, so if the bulls
have an opportunity, it should be right in this area. Even though those overbought conditions
have abated, it is worth remembering that they were so strong. When that occurs,
the market is usually in a bullish phase for a while, although sometimes a short-lived pullback –
such as we are experiencing – occurs first.