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Technical Analysis: Market Faces a Big Test

The action off the bottom we identified in mid-August has been bullish indeed, but now comes the real test. Bullish sentiment is rising (Investors Intelligence bulls-bears have gone from 40-37 to 54-27), commercial futures traders continue to pare long positions in the big S&P futures contract, and the NYSE advance-decline line is lagging badly, all evidence of rising risk for long stock positions. The environment could remain favorable for longs for a couple more weeks, but out of respect for the calendar and seasonality, cash might be the safest option from Oct. 7 to Oct. 29.

The S&P 500, of course, represents the biggest test for the market here. If it can decisively break through its July and 2000 highs of 1553-1556 in the next two weeks, it could be off to the races for the bulls. If not, it adds further evidence to the case for caution. We will keep you updated as market conditions change and expect to resume regular publication of the Technical Analysis column shortly.

Paul Shread is a Chartered Market Technician (CMT) and member of the Market Technicians Association.