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Stocks Could Only Experience a Short Correction

David Becker
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It seems uncanny how technical indicators seem to line up with fundamental events that can sway the direction of a stock market. The S&P 500 index struggled to make a new all-time high but finally pushed to new highs on Thursday and Friday of last week. The struggled, came as investors saw stocks rally back from their February 1, 2014 lows, as economic data continued show weakness.

Many of the technical indices that are used to gauge stocks showed that the large cap S&P 500 index was overbought and could see a short term correction in the near future. The percentage of stocks that were above their 200-day moving average moved up to 83% on Friday. This coincided with the 200-day moving average of the %, and seemed to be strong resistance.

The high over the past 2-year was a robust 95% seen in May of 2013, and the low over the past two years was 45% in June of 2012. Although the current level is not an extreme it is very close to the top end of the range. The percent of stocks in the S&P 500 index that are above their 50-day moving average is 74%, which is also near its 2-year high of 83%.

The quick change in market sentiment could be short lived as stock moved lower on the heels of the move by Russian into the Ukrainian peninsula of Crimea. Volatility increased significantly, but the change is likely to be short lived. The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels was only printing near 63 on Friday, which despite the new all-time high in the large cap index, failed to reflect and overbought situation.

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