The current SIA U.S. and CAD Sector Scope shows us that the current rally is a bit long in the tooth with the sectors clearly moved far to the right indicating they are reaching overbought conditions.  At the present time the Bullish Percents for the major indices, NYSE and the S&P/TSX are overbought and are at their highest levels since late 2007 and late 2006 respectively.  In these conditions large rallies upwards can occur but we must be cautious and ready to act defensively should the Bullish Percents move negative.

Below is the SIA U.S. and CAD Sector Scope for November 25, 2008.  The importance of this date is that the NYSE Bullish Percents reversed up 6 X´s from Oversold levels indicating we should start making researching purchases of equities.  The Sector Scopes are the first place to start with this research.  If we look at the top 15 Favored Sectors on November 25, 2008 shown below in the green and compare them to the top 15 Favored Sectors on the Sector Scope above we will see that all but 1 sector, Banking, remain as the top sectors to hold.  This type of evaluation highlights the importance of both the Bullish Percents and the Sector Scopes as tools we need to use when we evaluate the markets.

Our first index evaluation for 2009 is the S&P/TSX Composite.  Heavily weighted in Banking and Energy this index dropped nearly 50% from its peak in July of 2008.  This decline nearly matches the  losses seen after the Technology meltdown in the last market cycle. 

Since finding support at 7,741 the TSX has been building a large Triangle that will resolve itself either Bullishly at 9,436 or Bearishly at 8,054.  When a Triangle forms at the bottom of a move down it has a high probability of ending up being a Bearish Triangle.  When a Triangle forms at the top of a move upward then it has a high probability of finishing as a Bullish Triangle.   Time will tell if we can break the odds and move up with this one.

The S&P/TSX Venture Composite is a good example of the devastation one can face when investing in junior capitalization stocks if you do not use a disciplined approach of taking profits in rallies and keeping stop losses.  The TSX-V fell nearly 80% in the recent downturn.

As of late though the TSX-V has made a respectable advance with its first Double Top since August of 2007.  The current trading range is between 763 and 996 with its current level in the bottom half of the range.

In the broader range we have support at 678 and resistance at 1,225.  The current ranges offer good risk/reward situations but as per usual we recommend that you keep stop losses and set price objectives for profits on the volatile junior stocks.  This is especially prudent given the overbought level of the Bullish Percents.

The Dow Jones Industrials is one of the best looking indices at this time.  After holding support at its March 2003 lows the Dow has moved up tested resistance at 8,794 moved back to support at 8,287 and now broken out with a Triple Top formation with its move above 8,970.  All Textbook moves.

In its current range between 8,124 and 9,709 the Dow currently sits in the top part of this range.  Given the extended nature of the Bullish Percents new positions would be hard to make at this time unless trading for a short term profit was the objective.

Use pullbacks to the 8,124 - 8,287 range as a time to evaluate new positions should the Bullish Percents and Sector Scopes be in agreement at that time.

The NASDAQ Composite is the last of our index analysis in this weeks ELW.  After falling nearly 60% in the recent downturn the Nasdaq has moved up nicely and taken out resistance after moving above the 1,536 level.

In its current trading range between 1,506 and 1,800 the Nasdaq still has room to the upside as it sits in the middle of this range. 

Looking at the 1,800 level we should consider this level steep resistance as the Nasdaq has lost momentum here twice before.  Use this level as a chance to take some profits on some of your riskier names and use pullbacks to the 1,506 - 1,536 range as a time to evaluate new positions should the Bullish Percents and Sector Scopes be in agreement at that time.