UPSIDE PRICE AND TIME TARGETS HAVE BEEN REACHED -- OVERBOUGHT READINGS ALSO SUGGEST THAT MARKET IS VULNERABLE TO SOME PROFIT-TAKING

MAJOR INDEXES REACH JANUARY HIGH ... When this rally first started during March, I suggested that it could reach the January peak which would also bring some of the major stock indexes closer to their 200-day moving averages. On April 3, I added a time target into early May. That was based on the fact that the January to March downturn had lasted two months, which allowed for a two-month rally. As of this week, upside price and time targets have been fulfilled. Charts 1 and 2 show the NYSE Composite and the Russell 1000 Large Cap indexes having reached their January highs and trading just below their 200-day moving averages. Given also the fact that several of our short-term momentum indicators have reached overbought territory, the odds for a pullback have increased. Chart 1 shows the 14-day RSI for the NYSE Composite Index reaching the 70 level for the first time since the rally started. Chart 2 shows the 20-day Commodity Channel (CCI) Index starting to back off from the 200 level which matches its January peak. If a pullback does ensue, a likely downside target would be to the 50-day moving average. That would also leave open the possibility that a pullback from current levels could be a "right shoulder" in a bottoming formation.

Chart 1

Chart 2

S&P 500 SHOWS LOSS OF UPSIDE MOMENTUM ... Chart 3 shows the S&P 500 trading just shy of its January peak and its 200-day line. The black line above the chart is the 12-day Rate of Change (ROC) indicator which measures short-term trend momentum. The short-term trend is up as long as the ROC remains above its zero line as it is now. The fact that its May peak is below its January peak (red arrow), however, creates a short-term "negative divergence". The green arrow shows that the March upturn started with a "positive divergence" when the March trough formed higher than the November trough. What's still missing is a trigger to signal that a correction has actually started.

Chart 3

BOLLINGER BAND WARNING ... Chart 4 applies Bollinger bands to the S&P 500. The trend remains up as long as prices remain above the 20-day average (near 875). A close, therefore, below the 20-day line is needed to signal the start of a downside correction. The %B indicator on top, however, is starting to back off from overbought territory at 1.00. That shows a short-term overbought condition. [A %B reading at 1.00 coincides with price touching the upper band. A drop below 0.50 would concide with a drop below the 20-day average]. The line along the bottom measures Bollinger band width (BB). I've explained before that a falling BB line means lower volatility and higher prices (contracting bands). A rising lower line usually coincides with lower prices (expanding bands). Chart 5 shows Bollinger band width starting to rise from the same level as the January and February lows (when prices fell). That's another warning that the current rally may be due for some profit-taking.

Chart 4