Market Hits Overhead Resistance
by Carl Swenlin

The structure that has dominated the price pattern for nearly three years is a rising trend channel, which I have drawn on the S&P 500 chart below. As you can see, the price index has once more encountered the top of that channel, and that resistance will probably prevent any significant price advance until overbought conditions have been allowed to correct.

That is not to say that a major price reversal is imminent. It is certainly possible, but it is also possible that prices will dribble along the bottom of the overhead trend line for several months as happened prior to the summer price lows.

There are two things that argue for a major price decline. First, is the seasonal weakness that the market traditionally experiences in October, and the other is the 4-Year Cycle lows, also expected in October.

On the other hand, investor sentiment continues to remain at strongly bearish levels. Note on the Rydex Cash Flow Ratio chart below that the bears have scarcely budged from the bearish side of the three-year range, in spite of the fact that prices have moved steadily higher.

Bottom Line: It seems reasonable to expect some weakness over the next several weeks, but I will remain bullish until our mechanical model says otherwise. Even though cyclical and seasonal pressures present problems, I think that sentiment is the trump card. It is hard for me to imagine a major decline beginning when there are so many bears out there.

Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics if conditions change.

*RYDEX CASH FLOW RATIO: The Rydex Cash Flow Ratio gives an improved view of sentiment extremes by using cumulative cash flow (CCFL) into Rydex mutual funds rather than using the totals of assets in those funds (which we use for the Rydex Asset Ratio). It is calculated by dividing Money Market plus Bear Funds CCFL by Bull Funds plus Sector Funds CCFL.

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association.