Could Be A Good Spot For a Pullback

• Posted by Greg Harmon
• on May 23rd, 2013

About 7 weeks ago I noted that the Percent of stocks trading above their 200 day Simple Moving Average (SMA) was getting up to historical resistance levels in this piece, and suggested tightening stops and protecting. The markets did work through a minor rough patch before moving higher two weeks later. But the percent of stocks above their 200 day SMA did not reset. In fact from a review of the chart below that percentage has broken through the trend line and is at the previous highs from 2009. There are two things that having 94% of stocks above their 200 day SMA tells us. First this is a

very powerful bull market. Second, there is not much room for this to go higher. That does not mean it will go lower, history shows that it can stay at this level for a long time. The high in 2009 lasted for 9 months. But this chart also shows you that when the percentage does move lower it has always been accompanied by a pullback in stock prices. Finviz.com shows that 4694 stocks are above their 200 day SMA but only 2962 are 10% above it. The reset of this statistic to the low 60s then could occur with less that a 10% move. For the time being the trend in stocks remains higher, despite Wednesday’s selloff, and thursday’s premarket action, but the percent of stocks over the 200 day SMA remains elevated and worth watching for a reversal. And this happening right in front of a 3 day weekend? Maybe it is time to extend that to 5 days.

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