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Sunday, February 21, 2010

Reviewing the charts -- can this rally last?

If you're wondering whether the current rally has legs, I'd like to submit the following charts. They're derived from data collected during our Alert HQ process and they provide a high-level look at a couple of the indicators we track across the whole market.

The view from Alert HQ --

Let's start with our moving average analysis.

For this first chart we count the number of stocks above various moving averages and count the number of moving average crossovers, as well. We scan roughly 7000 stocks and ETFs each weekend and plot the results against a chart of the SPDR S&P 500 ETF (SPY).

The yellow line has crossed above the magenta line. This is a clearly bullish development as the number of stocks above their 50-DMA has moved above the number of stocks whose 20-DMA is over their 50-DMA. We almost always see stocks advancing when this situation occurs. In addition, please note that well more than half of stocks are now above their 50-DMA which is a big improvement over the last couple weeks.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.

With the red line plunging, we know that the number of stocks in down-trends has decreased rapidly. Conversely, the number of stocks in up-trends (the yellow line which has turned up after recently bottoming out) is clearly increasing.

The outlook --

These charts show that stock market gains have been strong and broad-based. These charts also show that stocks have not yet reached bullish extremes. Indeed, I keep reading that bearish sentiment is alive and well despite two weeks of decent advances in the stock market.

This leads me to think this rally does indeed have legs. It may not be a straight-line run to new highs but I'm feeling confident that stocks will see at least another couple weeks of solid gains. And that could get us to some new highs for 2010.

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