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The State of the Trend

In the end, Art Cashin's dire warning that something very bad will happen within the next 60 days managed to spook only a few DJIA traders. Unlike the DJIA, the SPX and QQQ reached new highs. In the process, they managed to break out of their narrow trading ranges, in place since January, for the Qs:

Once the concept of trend is understood and properly applied, and once the assumption is made that similar conditions are likely to produce similar results, there's really no reason to freak out at every market turn and sound bite. Besides, the VIX rising above 20 does not mean the end of the world eihter. It just happened in December.

For the time being the trend is up and, as the chart above shows, there are plenty of price levels that need to be broken first before a trend change occurs.

Let's review some of the more tangible warning signs that may signal an imminent change in trend. One of them is bullish sentiment which has been in overbought territory since the beginning of January '13:

A closer look at the data reveals that similar conditions lasted for about 40 trading days in the recent past, and were followed not by an immediate market collapse but by a period of choppy market action which lasted for another 20+ days, before an 8-10% correction followed. A similar outcome this time around points to the end of April, beginning of May.

Not so reassuring is the market barometer chart. This particular indicator has been hovering in the overbought zone for three weeks in a row, and is exhibiting a negative divergence with the SPX. While this fact is troublesome and should be taken seriously, we should point out that in trending markets this indicator could be a little early at signaling trend reversals.

In summary, while there are some warning signs on the horizon, as long as price remains within an upward channel and above key support levels, the trend is up and higher prices are to be expected.


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