The S&P 500 caught up to the leaders (Transports and Nasdaq) and hit the April high, and also closed at its highest level in two years.  This moves actually makes the technical picture a easier for us, if you believe in the whole technical analysis thing. 

The S&P broke out above the top side of the longer-term parallel trading channel (line "B").  What's nice about that is that we might expect that line to now act as support during any pullback.  Resistance, once broken, tends to act as support.       
        

                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

If the April high is meaningfully broken, as we have seen in the Dow Transports and the Nasdaq, then even line "A" may act as support - although it would not be very strong support. 

Should we start seeing a pullback, lines "B" and "D" are the next support levels to watch ("D" is the short-term trend support line and also representing the 20-day EMA), and then the 50-day EMA ("E").

As I mentioned yesterday, I am not completely convinced that this market is for real, but I am not going to fight it until it starts to show some signs of a break down. 

In a bull market you want to be a buyer of dips, but when is a dip a danger sign rather than a buying opportunity?  Should the market crash at some point, it is very likely that we will get some warnings beforehand.  I will use the 1987 market crash as an example.

In 1987 the Dow was flying along with a few consolidation periods along the way, but ultimately peaked in August.  Near point "A" on the chart below, an initial pullback broke below the short-term support line, and the 20-day EMA.  That's a red flag and you might have sold there, but it was such a bullish market that many would have been happy to buy the dip.

The 50-day EMA  was broken a few days later, another warning, but the Dow jumped above and below it for a few weeks before eventually moving below the longer-term support line at point "B".  That was another big red flag and investors should have been getting a little worried.


                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

When point "C" was broken, it created a lower low, which which made the prior high (point "LH") an official lower high.  If that didn't scare you, about two days later the 200-day EMA was broken. 

Things got progressively worse from there so if any market timer was still in stocks at that point, there were not paying attention.  The drop was so quick from there and I noticed that the 50-day EMA did not cross below the 200-day EMA (the bear market sign) until the damage was already done.

Just a little history lesson.  Market crashes tend to come during poor market conditions rather than from market highs, and even the 1987 market crash, which surprised a lot of people, gave enough signs for those paying attention.  The buy and holders never had a chance.  

As I mentioned above, the technical picture for us is a little easier because there are a few good well defined areas on the current S&P 500 that, if broken, give us our warning signs.

TSP Talk Sentiment Survey System is moving to a sell signal for next week as our readers became very bullish with the help of yesterday's 220-point rally.  The bulls (70%) to bears (23%) ratio hit 3.04 to 1, well above the 2.0 to 1 ratio sell signal.  The system will move to 100% G for next week.  Through Thursday, the system is up 25.95% for 2010, and assuming the market doesn't plummet today, it will be locking in those gains at least through next week.

Today we get the October jobs report.  Estimates are looking for  gain of 60,000 jobs and an unemployment rate of 9.6%.  The fireworks may not be over.

Update: Actual, +151,000 jobs and 9.6% unemployment.

Thanks for reading!  Have a great weekend!

Tom Crowley