- Dugald Malcolm

Montreal, Canada

Since I last gave a technical update on March 9th, the S&P has managed to make several successful bullish moves to the upside, taking out a couple of key levels of resistance on the way.

To begin with, the 1,150 resistance level, representing the previous highs made back in January, were taken out on March 16th. More significantly, however, was long-term downward level of resistance that has been in place since October of 2007. The S&P has managed to push above this level and, more importantly, stay above it, albeit on less than stellar volume.

I am not the only one who is seeing bullish indicator being given by the charts. Earlier this week, Richard Russell, the editor-publisher of the Dow Theory Letters, noted in his daily comments that the DOW too has given significant bullish signals. The first was that the DOW had closed at a new high thereby confirming the move to new highs made by the DOW Industrial Transportation Index. This is a bullish indicator, according to DOW Theory. Next, Russell noted that the DOW is now above the 50% retracement level. This means the DOW has retraced 50% of its previous bull market move made from October 2002 to October 2007. Finally, Russell points out that there were 627 new 52-week highs made on the NYSE, trumping the previous new high totals made in January.

Despite all the bullish indicator flashing green, Russell says that he would not be buying at these levels. The DOW, he points out, is at a P/E of over 17 and the S&P over 23, with both indexes yielding paltry dividends. Eric and I both agree whole-heartedly with Mr. Russell on this one - stocks are overvalued at these levels. That is not to say the market can't go higher. It just means that caution is warranted.

I will be watching the S&P charts for signs of weakness here. The stochastic and MACD look like they might be turning around here. This could result in a breach of the short-term upward trend line I have drawn on the above chart. Further confidence would be gained if a subsequent move tested and bounced off the long-term downward trend line on the weekly chart.

I will be writing for Eric as he travels again on Monday, giving a technical outlook for gold.

Have a good weekend!