There's nothing bearish on this chart
David Russell | firstname.lastname@example.org
First, it's important to recognize some of the problems that have emerged in recent weeks. Several firms with a good view of the economy have been making cautious comments: FedEx and Norfolk Southern, for instance, both lowered their guidance on weak shipping volumes. Forward Air, another shipping company, painted a particularly graphic picture earlier this week, stating that daily tonnage turned negative last week following a "surprisingly strong" July.
Other companies such as contract manufacturer Jabil Circuit and electronics distributor Synnex have chirped up with a similar tune.
Geopolitical risk is also mounting overseas, with insolvent governments in Europe and ongoing regime change across the Middle East. But it's not clear how these developments will affect stocks. It also appears that Europe is thoroughly priced into the market, and only some kind of calamity in the Middle East would matter to share prices.
The biggest positive factor, in my view, is what I have mentioned several times in recent months: The bear market of the last 10 or 12 years is now coming to an end. Stocks remain underowned and investors are no longer interested in buying Treasuries. Companies are better run than ever, while bonds pay almost nothing and government finances are getting worse.
I have also looked back at all the crashes I know historically. All of them offered some kind of warning before they occured. Let's consider a few:
October 1987: The S&P 500 had peaked in August 1987, then rallied back to make a lower high at the mid-August support levels. But today, the S&P 500 is holding its ground and finding support above the 1420 level that was previously resistance.
August 1990: The S&P 500 had a false breakout with bearish MACD divergence. It then slipped below its 50-day moving average and failed to make a higher low. Nothing like that is happening now.
February 2007: The S&P 500 also had a false breakout with bearish MACD divergence. Same as August 1990.
October 2008: The S&P 500 had been trending lower for months, with all the key moving averages in descent. Just the opposite is true now.
May 2010: While this "flash crash" was exacerbated by high-frequency trading, it followed a period of waning momentum and came after the S&P 500 failed to hold its 50-day moving average. Not the case at present.
August 2011: While the headlines focused on "government shutdown," price action also telegraphed this crash. The S&P 500 had already made a false breakout in May, followed by lower highs in July. Its 50-day moving had also been falling for months before the selloff.
The market is showing none of these conditions now. We've been holding steadily above the 50-day moving average while making higher highs and higher lows. The MACD indicator continues to rise, and we're now consolidating above the 1421 area that was resistance all the way back to mid 2008.
Volatility is also very low at about 14 percent over the last 50 days. Almost every collapse has been preceded by an increase in volatility. So far, no warnings signs there.
Looking beyond the S&P, it's also hard to find anything ominous in other charts. The euro has been pulling back, but looks bullish as long as it stays above roughly $1.2750. Treasury yields have also been climbing.
The bottom line: We may push lower, perhaps testing 1420 or even 1400, but the trend remains higher and pullbacks are to be bought.
(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of Sept. 26.)