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EXPECTING UPSIDE BREAKOUT

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On Thanksgiving Day Dubai announced that it would be delaying loan payments by six months. This resulted in a global selloff, in which the U.S. markets participated on the following day. There was virtually no follow through selling this week. Looking at the S&P 500 chart below, you can see that the Dubai selloff is practically invisible within the context of the trading range of the last several weeks.

In fact, the market is consolidating during a time when I had expected it to be declining into the 20-Week Cycle low. Because of this I have had to reconsider my cycle assessment: It appears that the 20-Week Cycle low occurred on November 1, about three weeks ahead of schedule. Early or late arrival is a frequent occurrence, but not something we can know until after the fact. All we can do is adjust accordingly. At this point, I think a new 20-Week Cycle began on November 1. The next major cycle-related correction low is projected for April 10, 2010 when the 9-Month Cycle is due to bottom.

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Let's look at the chart again. What I see is a flag pole (the rally from the November low) and flag (the recent three-week consolidation). The technical expectation from this formation is an upside breakout with an initial target of about 1180. We are in a bull market with the market behaving extremely well, so I have high confidence in this outlook. If prices drop below the bottom of the flag, breakout expectations would be negated.

Next is a monthly chart of the S&P 500, and it contains some very bullish evidence. The monthly PMO (Price Momentum Oscillator) is rising off a very oversold reading (lowest since 1932), and it has crossed up through its 10-month moving average. There are only four other deeply oversold PMO bottoms since 1929, and all were associated with new bull markets. Four data points in 90 years is a thoroughly inadequate statistical base from which to draw conclusions, but, understanding how the PMO works, I think the bull market is likely to continue for at least a year and could easily challenge previous all-time highs. Be advised, however, the positive long-term picture does not eliminate the possibility of substantial corrections along the way, but a smoothly rising monthly PMO presents a solidly positive long-term technical picture.

091204_cspot-2
Bottom Line: Technically, the market is showing solid strength, but the bull market is running strictly on speculation and emotion, and there is virtually no fundamental support under the market. The Dubai event is a good example of the kind of thing that has the potential to start an avalanche of selling. There are probably hundreds of them waiting in the bushes. Taken one at a time, they may only cause a momentary ripple. If too many pop out at one time, it could end in disaster.

Carl Swenlin
About the author: is a veteran technical analyst who has been actively engaged in market analysis since 1981. A pioneer in the creation of online technical resources, he was president and founder of DecisionPoint.com, one of the premier market timing and technical analysis websites on the web. DecisionPoint specializes in stock market indicators and charting. Since DecisionPoint merged with StockCharts.com in 2013, Carl has served a consulting technical analyst and blog contributor. Learn More
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