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Saturday, May 25, 2013

Does This Pullback Have Legs?

Ryan Detrick, Schaeffer's Trading Floor, May 24, 2013

The SPX recently spiked above the upward channel that it has been trending in since this rally started in November.  Just as quickly, it has pulled back inside the channel.  I do have my concerns that breaking out of this channel was a last hurrah for the bulls.  When coupled with the Russell 2000 rejected at the 1,000 area, there are some warnings in the charts for the first time in months. 

Could we be looking at the well deserved pullback that so many have been calling for since February?

At this point, a moved back down to the lower channel and 40-day moving average could be perfectly normal and healthy.  That lower channel is down at 1,600 and would represent a pullback of about five percent based on current levels.  This makes sense, but if we go much beneath that then things could be uglier.  Let’s pass that bridge when we come to it.

When you see things like the Investors Intelligence poll showing 54.2% bulls (highest since February), the AAII poll showing bears down to just 21.58% (lowest since February ’12) and multiple bullish magazine covers (I’m looking at you Barron’s and The Economist), it makes sense to take a step back and re-evaluate things.  At the start of the year, things looked much more bullish and fortunately that has played out perfectly.  But all rallies will end eventually.  This isn’t the end of the world, nor is it the end of the bull market.  I do believe by the end of the year we’ll be well above the recent highs we just set.  Still, as a trader, you have to always be open to anything and things are cloudy out there right now. . . .

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