Chance for a Rally, but It Won't Last Long

Was it the employment number that turned folks so bearish so quickly? I'm not quite sure. You see, it's not as though the 10% number hasn't been discussed ad nauseam. Oh, maybe it's that the wages number got to folks. Nah, it's not that we expected wages to be up, did we?

Could it be that the commodity stocks, and commodities in general, have come down so hard? But then beloved tech hasn't cracked that much, has it? Oh, maybe it's just that now the head-and-shoulders top is so obvious. I mean, after all, doesn't this look as though it came right out of a textbook?

If you're wondering how it is that I think folks have turned so bearish so quickly, it's because the total put/call ratio zipped up over 100% again on Thursday. After not having had a reading over 100% in three months, we now have had four readings over 100% in the past few weeks. Although I suppose not everyone is bearish, as the equity put/call ratio leaned toward the low side at 70%.

But let's discuss the 50-day moving average. Forget the "golden cross" absurdity and focus on the direction of the 50-day moving average. Fifty trading days ago was April 23. On the chart above I have indicated that point in time with an arrow.

Notice that in the two weeks of trading after that arrow, the market moved up into the May high. We are currently trading about 10 points below the 50-day moving average. But the moving average line is still rising. I have always believed that a rising moving average line doesn't act as resistance in the same manner as one that is declining.

Therefore, the next few weeks will determine the direction of the moving average line. A break of the neckline of the head-and-shoulders top would then measure to 790 on the S&P 500. But more so, it would probably mean the 50-day moving average line will roll over. And a declining moving average line is more likely to be resistance than a still-rising one.

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At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.