TRADING VOLUME REMAINS LIGHT -- BUT MARKET IS LOOKING A LOT STRONGER

SHORT-TERM UPTREND LOOKS OVERBOUGHT... The market ended a shortened trading week with a Thursday bounce. The lack of trading activity continues to cast a pall over the recent price gains. In addition, daily stochastic lines remain in overbought territory over 80. A more positive picture is shown by the MACD lines. The daily price bars show the S&P 500 exceeding a down trendline drawn over the March/April highs. That's a good sign. That trendline should be the first line of support on any pullback. If that doesn't hold, more significant support is likely near the (blue) 50-day moving average. Chart 2 shows that the Dow Industrials have yet to exceed their down trendline.

Chart 1

Chart 2

WEEKLY CHART LOOKS POSITIVE... Weekly bars take precedence over short-term trends shown on the daily bars. Weekly indicators can over-ride daily signals. Weekly bars also put trends in better perspective. To me, the weekly S&P bars look to have completed a three-month A-B-C correction. The fact that the correction turned up at the (red) 40-week moving average is another positive sign that the recent correction has run its course. The two parallel trendlines on Chart 3 also have the look of a "flag-like" correction. That's another reason why this week's break of the upper resistance line is a good sign.

Chart 3

PARABOLIC BUY SIGNAL... Here's an indicator that I don't write about too often. But I do watch it. The dots on the weekly bars are Parabolic SARs (Stop and Reversal Points). When the market is rising, the SAR dots act as stoploss points under the market. The dots as as stopout points over the bars when the market is dropping. That was the case for the last thirteen weeks as the market corrected. This week, however, the S&P hit the upper SAR and reversed to the upside. Notice that this week's dot is below the price action. That's a bullish sign that a new uptrend may be emerging. The monthly bars in Chart 5 also paint a positive picture. It shows that the Parabolic SAR dots have been bullish (under the price bars) for the last thirteen months. The S&P would have to hit the lower dot (currently at 1050) to end the major uptrend. Lastly, the daily SAR dots in Chart 6 also show an uptrend. The S&P would have to drop to the last SAR dot at 1117 to end the short-term uptrend. That puts all three charts -- daily, weekly, monthly -- in SAR uptrends. What all of this suggests is that the recent downside correction has run its course, and a new upleg may be starting. It's going to need more volume if it's going to last. At the very least, however, I expect a retest of the early 2004 highs.

Chart 4

Chart 5

Chart 6