This market “refuses to die”,

What a rally!  No matter what the bad news is,  disappointing jobless claims, Goldman Sachs fraud investigation or even volcanic ash over Europe, the Stock Market participants are in good spirits.

Now I am not a “perma” Bear, but now is a time to be a little careful.  We have just kicked off earnings season and things are looking positive so far.  But lets be clear about this, we need an amazing round of earning reports, including revenue growth, not just earnings growth due to companies cutting expenses by making more and more people redundant.  Why do we need a great earning season?  We need it just so we can maintain these levels in the Stock Market.

The last time I checked the Price Earning of the S&P500 was at 21.  Historically, a P/E of the major US indexes has not been sustainable over 25.  In 2000 we reached a PE of nearly 45 on the S&P500 and we all know what followed.  So, I would not say the market is at a huge discount today.  However, there are still plenty of bargains.

Technical Analysis of the Stock Market

As I has discussed many times in the lessons on RSI / TSV / ROC / Momentum, we need to look to divergences of the Price & Price / Volume indicators with price.  I believe we have one such divergence occurring with the SP-500, DJ-30 and the NASDAQ Composite.

RSI Divergence DJ-30

Now I am not saying cash in your chips right now, the market is in a short / medium term uptrend.  Simply be on maximum alert and keep your stop losses tight.

As Charles Dow said…

“A trend is in effect until it gives definite signals of a reversal”

We do not have a definite sign of reversal yet.  We have simply some early warning signals.