In the past month, we've had quite a rally off the lows--the S&P 500 is up over 25%. Thus far the market's breadth has been keeping pace with the major averages such as the S&P, which I believe has helped keep the rally going. As we head into mid-April, I believe we will likely see a market that is overbought. To determine an overbought or oversold reading on an intermediate-term basis, I use the 30-day moving average of the advance-decline line. In my view, this indicator was grossly oversold in mid-March. I expect it will be overbought sometime just after April's option expiration.
Source: Helene Meisler, as of April 9, 2009. Source: Helene Meisler, as of April 9, 2009. When examining levels on charts, we tend to look at crossing trendlines as meaningful. They are, but when we cross a trendline that is also a resistance or support level, I believe we should have more conviction in that move. In other words, the chart has now "broken" two things at the same time. On the chart of the yield of the 10-year Treasury note, shown above, we see the potential resistance from a few weeks ago in that 3% to 3.10% area, which is also approximately where the downtrend line comes in. Should the yield on the 10-year note cross through 3% to 3.10%, I would consider that an important breakout. In my view, higher interest rates would likely turn into a negative for the stock market, or at least make it more difficult for the market to make progress on the upside. Source: Helene Meisler, as of April 9, 2009. Point B was May 2008 when the S&P was around 1,400. It did not go higher thereafter and, as you know, we haven't seen that level since. However, in mid-July (six weeks after the reading came out), we fell to 1,214, where we then had a multiweek rally. Point C is the most recent reading. So far, the market's rally has been strong, but I believe the market is heading toward an overbought reading. Bond yields have the potential to start rising and sentiment is such that we ought to see a market correction begin to take shape in the latter part of April.