June 16, 2009
The S&P 500 celebrated its great technical accomplishment highlighted in our last note by doing exactly nothing. Maintaining a tight 32 point range from top to bottom, the S&P 500 netted just over 3 points from our previous note to the closing price last Friday, June 12. This week has changed the tune, giving up more than 34 points in just two days. Surrendering initial support in the 925-930 area designated by the May highs, the SPX is once again bearing down on the 200 day moving average, this time from above. Additional support of the 50 day moving average is also moving into the area, just 15.5 points below the 200 day as of today, and rising. The lows from May, which are also the highs from April and February, mark another major support level in the 875-880 range.
Both the MACD and the daily 13/34 exponential moving average indicator have signaled a negative divergence by not confirming the new highs in the price of the average. With the January highs holding as resistance, the head and shoulders bottom we discussed in Still overbought, but over first resistance also is still in play. As we noted, “…finishing the inverse head and shoulders bottom should happen somewhere around the end of June time wise to produce a symmetrical pattern. At this point, it looks like the January highs need to hold as resistance to keep the inverse head and shoulders pattern in play. This is also the approximate level of the 200 day moving average currently and the 200 day stopped the SPX multiple times from 2001-2002, plus twice early in 2003. The first test early in 2003 led to the formation of the right shoulder in the bottoming pattern and the second test required a test of the 50 day moving average as support before breaking out and leaving the 200 day well behind.” With the 50 and 200 day moving averages relatively close together this time, plus the support of the recent lows/previous highs around 875-880, this market has plenty of candidates for a right shoulder not far from current prices. A convincing move back below 875 would signal a deeper correction with targets as low as 741 still completely valid.
Which brings us to the market leading NASDAQ Composite. Since our last note highlighting the breakout by the COMP, a brief rally has fizzled out with the last two trading days completely erasing the gains and setting up a quick test of the breakout point as support. The rally stopped short of filling the gap opened on the way down in early October 2008, but did manage to bring the 50 and 200 day moving averages into a bullish golden cross. Plenty of support exists for this market, but it doesn’t come into play until 60-120 points below the breakout point at 1785 if the breakout fails to hold. Targets as low as 1500 do not invalidate the uptrend if the SPX makes a run toward the 2002 lows or even 741. The MACD is also showing a negative divergence here by not confirming the new high in price and the ROC shows a failure to build momentum on the breakout.
We are again returning to our short positions, including SH, after precautionary stop outs proved unnecessary and untimely. Our position in SH specifically was re-entered exactly at the stop out price (see Security Growth for details).
May 5, 2009
Another update finds the market shaking off initial profit taking to challenge the highs for the year. Monday’s big push finally left the late January, early February highs behind for the S&P 500 (SPX) after about two weeks of backing and filling to make room for the exit of early profit takers. Volume for this stage of the rally has not been impressive, declining since the large profit taking day in the third week of April. What is impressive, is new buyers have stepped up to continue to push prices higher. Fear of “missing the bottom” is setting in and chasing the rally at this point remains dangerous.
The NASDAQ has been leading the charge, already surpassing the highs for the year to challenge the early November 2008 highs and the 200 day simple moving average. Up more than 39% in less than two months is a remarkable move and building on that through the seasonally weak summer session is going to be difficult. Up days are beating down days by more than 2 to 1 since the bottom, but the pace of gains is decelerating. Volume has remained relatively solid and this change in market leadership posture is notable. Investors have clearly decided to favor more aggressive stocks in this recovery, with the small and mid caps also showing relative strength.
It’s time to break out a chart we were saving for later, as the comparison may be valid already. This is a chart of the bottom formed in the SPX during 2002-2003, after the tech bust. While the bottom itself formed an inverse head and shoulders pattern (which we expect this time also), the recovery from the right shoulder is what really interests us here. Since the drop was not as violent and much more time was worked off with the head and shoulders bottom, the moving averages were not as far above the low prices and were overtaken sooner as a result. But look at the trend that steadily moved up from March to June, before flattening out for the summer, then racing higher again into 2004. It was less than a 30% gain for the first leg up in 2003 from the March low; it’s already 36% for the SPX from the bottom in March this year. While the low was much lower this time, the highs and resistance levels from both years are almost identical. In 2003, the SPX overtook the early January highs around 930 in early May. After a quick, steep drop below 920 to test the breakout, it was off to the races for another straight month, rising over 10% before the June highs. Then it was one test of the inverse head and shoulders neckline in early August at 960 before moving over 1150 by early 2004. This year, the early January highs are in the area of 944 and the SPX is again challenging them in early May. A breakout here followed by a retest of the 920 level could again produce a similar result. The only problem is finishing the inverse head and shoulders bottom, which should happen somewhere around the end of June time wise to produce a symmetrical pattern. At this point, it looks like the January highs need to hold as resistance to keep the inverse head and shoulders pattern in play. This is also the approximate level of the 200 day moving average currently and the 200 day stopped the SPX multiple times from 2001-2002, plus twice early in 2003. The first test early in 2003 led to the formation of the right shoulder in the bottoming pattern and the second test required a test of the 50 day moving average as support before breaking out and leaving the 200 day well behind. Either of those would be a welcomed event for this market to burn off some overbought conditions and excess euphoria. With the VIX at the lowest levels in seven months, purchasing some protection via puts is probably a good idea. We continue to hold and look to add to our position in the ProShares Short S&P 500 ETF (SH) which is about 5% under water now from our first entry. Select longs continue to beat the market averages by a wide margin.
April 14, 2009
An update on the SPX chart today to show the market finding resistance near previous highs. We are adding a new indicator to the top of the chart, the MACD. The negative divergence in the MACD histogram reinforces the strength of this resistance as the market advance begins to stall. Finally, we have a short term reversal pattern showing in the candlesticks as an Evening Doji Star has formed over the last 3 trading days. Taken together, it looks as if profit taking may have already started.
The NASDAQ chart shows similar resistance being met at the Jan highs with negative divergences in the MACD histogram and the Rate of Change indicator which is approaching the zero line. Both of these confirm the loss of momentum as the market approaches resistance.
Exactly the opposite looks to be developing in the ProShares Short S&P 500 Fund ETF (SH) as positive divergences are present with the price firming near support. Hedging long exposure here and/or taking profits looks like a good idea. It’s still a bear market rally at this point.
April 2, 2009
We have a lot to show, so we’ll keep each one short and sweet.
First, an update on the SPX battle with the 50 day. The bear trap looks to be pretty solid with assistance from the Feds. How much backing and filling needs done is still up for debate. We have added a new indicator to the bottom of the chart this time, the daily 13/34 exponential moving average indicator. We have it set on a favorite parameter of John Murphy at Stockcharts.com that we have referenced previously in Is it really 2001 again? Look for further reference in the charts below. This indicator on the daily chart is more of a leading indicator (subject to some whipsaw) and becomes more valuable when combined with the medium and long period charts. The daily indicator has turned positive (above zero) and has held positive ground for the first time since early in the year. This is the most positive showing for this indicator since April/May of 2008.
Here is a weekly shot of the same indicator. Even with this indicator still deeply in negative territory (below zero) a clear positive trend change is visible. This is confirmed by the SPX moving above the 13 week exponential moving average, which drags the indicator higher. These are also the first positive developments in this indicator since April/May of 2008.
Finally we have the monthly chart featuring the indicators referenced previously (MACD, RSI, ROC) plus an overlay of the 20 month Bollinger Bands set to two standard deviations. This shows all of these indicators to have been severely stretched, yet showing signs of recovery. The MACD histogram is now climbing for two months in a row and the RSI is closing in on 30, which marks the top of oversold territory. The ROC has at least ceased its vertical drop and the Bollinger Bands are finally well below the current price as opposed to being violently penetrated to the downside. This at least shows stabilization, with potential being revealed by the shorter periods.
March 30, 2009
The SPX only stayed above the 50 day simple moving average this time for 5 days. At the turn of the year, it at least managed 7. The 2002 lows are crucial support to test the will of new buyers. If they fail to hold, the 741 level will serve as the canary to warn of a possible complete retest of the March lows.
So far, we have only another headfake to the upside created by jawboning from the Feds. We still believe this is part of a bottoming process, but we need more honest buying (not short covering) to confirm the lows are already in.
March 25, 2009
“It’s déjà vu all over again.”
– Yogi Berra
In mid-December, after the Fed lowered rates to 0 to .25%, we noted:
Aggressive action by the Federal Reserve today pushed most markets above their respective simple 50 day moving averages for the first time since September. We have highlighted the 50 day as resistance level number one in prior notes and have shown it to be critical resistance along with the 200 day and 80 week. This is a primary step to recovery and opens the door to a potential challenge of the 200 day near the beginning of 2009.
That rally was short lived, eventually failing after a more sustained move above the 50 day near the beginning of the year. What is interesting is that we may be seeing a similar sequence of events again.
After a brief dip below the 2002 lows, the SPX has rallied back significantly on the back of announcements from the Treasury and Federal Reserve. The combination of these announcements (along with better economic reports) has again pushed most major market averages over their simple 50 day moving averages. Unfortunately, volume has not expanded with this push, even though volume levels are higher than earlier in the year.
The market managed about 7 days above the 50 day in early January. So far, we have 3 days on this trip. To avoid a repeat of action earlier in the year, it is critical that the SPX remain above the 50 day and the 2002 lows. The Feds can do all of the grandstanding and wagon circling they want, but the market will not be forced higher. We need to see organic buying build on this foundation for the bears to truly remain buried below the 2002 lows. Ideally, a high volume rally will spring from support at the 50 day to challenge the Feb highs in the area of 875. If this occurs, the 50 day and 800 will serve as very solid support going forward as we move toward the Jan highs around 940.
If the market again fails after a quick Fed induced burst over the 50 day, we look at 741 as the first support level below the 2002 lows. A significant break at 741 would argue for at least a retest of the lows at 667. With other indicators showing improvement, including some leaders exhibiting notable relative strength, it is our assumption at this point that the lows at 667 will not be broken.
March 18, 2009
A shovel is not enough longs, we may have hit rock. The question is, did we hit rock bottom?
The 50 day moving average is in play once again. Can we remove this huge stone in time for Easter? The resurrection of the market depends on it.