I welcome comments on the Daily Market Outlook (DMO), and in response to yesterday’s DMO, which explained the use of the momentum indicator, Steve said: “TA [technical analysis] is never a precise endeavor. Making a judgment based on one single indicator is unreliable.”

I agree with Steve. He is absolutely correct. First, technical analysis is more art than science, and it depends on the skill of the analyst to interpret the many technical tools available before arriving at the current and future direction of the market. Noted technician Martin Pring, in his book Technical Analysis Explained, put it this way, “The art of technical analysis — for it is an art — is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has reversed.”

In the Daily Market Outlook, I use three generally accepted methods before reaching a conclusion as to the current and most likely future trend of the stock market: chart analysis (formations, trendlines and moving averages), internal indicators (MACD, momentum, stochastic and relative strength), and finally, the study of sentiment indicators, for which I primarily rely on the American Association of Individual Investors (AAII) weekly sentiment survey, the weekly Investors Intelligence (II) advisors sentiment study, and finally to a lesser extent the CBOE Volatility Index (VIX).

You may have noticed that this week we changed the format of the DMO by including more graphics and less writing in order to provide visual evidence that will enable readers to make better investment choices. Each day this week, I featured one example in graphic form: On Monday, I discussed the very unusual formation, identified by William J. O’Neal of the Investor’s Business Daily, called the “V Cup Base” (and I call the “deep V top”), and concluded that it was a negative formation and part of a “non-confirmation,” which could precede a market decline. And on Tuesday, the “deep V” formation of the Russell 3000 was inserted to illustrate the theory of “confirmation/non-confirmation.”

On Wednesday, the non-confirmation was applied to one of our most important internal indicators — the Moving Average Convergence/Divergence (MACD) — and I concluded that it, too, was providing evidence of a lethargic market.

On Thursday, a chart of the Dow Jones Industrial Average showed that one of the most important internal indicators — momentum — is declining, and that is telling us that the internal strength of the market is slipping despite a minor new high for the Dow.

Today, we’ll continue with the usual schedule of discussing the weekly results from the sentiment indicators. The results from both AAII and II are contra-indicators. In other words, a bullish survey favors the bears and a bearish survey favors a more bullish position.

This week, the AAII sentiment survey showed that bullish sentiment — expectations that stock prices will rise over the next six months — increased by 1.8% to 43.6%. This is the third consecutive weekly increase and puts optimism at a seven-week high. Bearish expectations fell 2.2% to 28.8% — the third consecutive decline in pessimism. The interpretation of this report is that the public is “cautiously optimistic” since the historical average for bullish sentiment is 30%, and overly bullish sentiment is considered to be in excess of 45%.

The other sentiment report, the II Advisors Sentiment shows an increase in bullish sentiment of 5.7% to 57.3%. The II says, “The new increase in bullishness is not a good sign as it signals more funds moving off the sidelines and into stocks.” They go on to say that this is the highest bullish sentiment since mid-December, and the latest reading “suggests increased danger.”

Next week, I will devise a chart that shows in some brief form, probably pluses or minuses, the implication of each of our studies. For now, however, we have enough evidence to remain in the bullish camp long term but expect a mild correction soon that will test the near-term support zone at S&P 500 1,290 to 1,330 drawn in the chart below. Note that the 20-day moving average (green line) crossed through the 50-day moving average (blue line) for a negative trading signal — one more piece of the puzzle that points to a mild correction.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.