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Market Set to Rally: A Summer Fling or Something More?

Thursday, 16 Jun 2011 01:54 PM

By David Skarica

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I use about a dozen or so technical indicators to track and trade the market.

I have used these techniques to trade for about the past 10 years. I have been able — through good and bad markets — to refine these indicators and techniques to maximize how successful they are in making profitable trades.

Right now, many of these indicators are very oversold and starting to say that we should see a significant bounce in equity markets.

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Let me give you an example of one of these indicators. A short-term indicator I watch is the number of stocks on the S&P 500 trading above their 20-day moving average. The 20-day moving average is the average price of a stock during its past 20 trading days.

When too few stocks are trading above this 20-day moving average, it is a sign that the market is extremely oversold. I usually find that when less than 10 percent of stocks on the S&P 500 are trading above their 20-day moving average, the market almost always see a short-term bounce.

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Wednesday, only about 6 percent of stocks on the S&P 500 were trading above their 20-day moving averages. This has only happened on three other times in the past seven years: October 2008, February – March 2009, and the summer of 2010. All of those times were, at the very least, good short-term trading opportunities with the market seeing strong rallies after these oversold readings.

How far this rally goes is another story.

The market could be forming a longer-term topping formation, which began earlier in the year.

However, at the very least, I would expect a strong stock-market rally in the coming months.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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