Sunday, April 12, 2009

S&P 500 this week and end of 2nd quarter - April 12

** Skip to summary to see forecast
Ok Lets state the purpose of this blog entry for this week:

I will review my past coverage of the S&P500 last week and discuss what I did wrong and where I can improve. I will make a prediction for the following week and make a call for the end of the second quarter for the S&P500. I will then do a brief update on my currency positions in a separate post.

*a warning for my followers: I primarily have better knowledge in currency markets and have a better track record in long term analysis. For the S&P500 I will primarily use technical analysis and sentiment along with fundamental economic support to determine price movements (a macro top down approach - which probably explains my past poor performance in equities; as a fundamental bottom up approach would have been more appropriate for the past 3 years and arguably still very relevant for today's equity markets)

Charts for next week and end of 2nd quarter forecast:

Chart 1:

Chart 2:


Chart 3:



I've been considering of reorganizing my portfolio so I decided to take up and analyze the S&P500; as it is a better indicator of the total financial markets vs the DOW which would probably a better indicator of sentiment.

At any rate lets see what I did wrong last week:

1. Getting chart time frames mixed up:
Apparently, I made a call that this monthly trend would pause or reverse based of daily price information. Considering the weekly bullish trend has not changed, it would have been more appropriate to extend my bearishness within the time frame of a few days. Though within technical analysis, reversal patterns can indicate trend changes, its very important to place it within the context of the current trend.

I would say that based of the volume trend from mid march along with the strong higher highs and higher lows pattern indicated a bullish weekly trend, however based off my candle stick reading for the 5th week my bearish analysis should have only extend to a few days.

** simple backtesting for the month of march would have shown that candlestick readings, if showing a bullish sign, did indeed have bullish price movements extend only a few days before before having a down day at the end of the week.

2. Reading literal support:
(Look to Chart 1)

I called that if prices pierced below 830 we would see the S&P500 hit 810. The problem was that actually support was 810, but most dow theorist will tell you that actually support rarely hits, hence as we saw prices bounced off 815.

Overall: admitting defeat:

I would have to say last week was a pretty crappy half hearted analysis (as i was attempting to do this after 10 hours of studies for final exams at 4 am). Keeping these mistakes in mind let us consider price movements for next week.


Forecast for 3rd week of April:

Overall looking at chart 2, I will have to say that this bear market rally will continue for week 6. However, there are tell tale signs popping up indicating that this bear market rally will a.) whipsaw to the downside if you are a bull b.) reverse to a continued down trend if you are a bear.

Considering the weekly trends I will say week 5 of the bear market rally did not disappoint with another higher high and higher low. I will point to 3 things why I think week 6 will be another up week.

1. the bullish step pattern (higher highs higher lows)
2. the volume trend (see the line I drew for volume)
3. Continued Trend channel (i did not draw it but one could imagine it from march until present)

Although, I expect this week upcoming week to be bullish again, I present risks to the model I just presented


We had a longer weekend as markets were not open on Friday the 10 (as it was good Friday). This allows for bearish sentiment to build. I will point to the many negative headlines I have been noticing, though more substantially the CBOE index/volume call/put ratio. Since April second, each day has been consistently bearish.

Looking at the end week candle we see indecision in the markets: as there is no distinct upper or lower tale, roughly equal bulls and bears for the close of the week. Given the latter two indicators, its possible that we will see a change in trend. ! however ! I will not make the same mistake as last week. IF the bullish scenario I gave for the 6th week is indeed correct, I expect to see something similar to last week (week 5; the early week to be down and with end of the week to be higher).

Due to gains takers along with bearish sentiment I would expect the first half the week to be bearish and then resume a bullish trend to make a higher higher and higher low for the week.

THOUGH, if I am wrong, sentiment can produce a lower low which would question the strength of this bull market rally.

2. The risk of the speed of higher high and higher low.

If prices to do reach a higher high early next week, this may cause psychological problems in the S&P500 as Chart 2 points to resistance at 870. Given prices move to fast there would have to be a significant full candle stick close above resistance of 870 for the bull market rally to continue. If indeed this could happen I could possible see this rally continue until the end of April and into May.

However , in terms of the 3rd quarter or 4th quarter I doubt the rally will be able be sustained that much; as evidence i point to chart 3 with multiple levels of resistance going all the way back to Nov. 2008. Keeping time frame in mind, I don't think this rally could have enough strength to break through such strong resistance.

Lastly, ( this argument maybe hard to follow)

I would like to point out to the interesting pattern we are seeing on the weekly chart (see chart 2). I would say much strength of the bull market rally was rooted in that you have strong opens during the week and a lower high at the end of the week for the first two weeks of the rally ( see the red circles). However, for the third week and fourth week we are seeing a pattern change. We see bearish sentiment kicking in at the beginning of the week for the third week (first two days are down), and we see bulls winning at the end of the 4th week instead of having a lower high (bulls win on Friday but with lots of bearish movements), and finally in the 5th week week we see something like a mix between the 3rd and 4th week where we have a bearish opening for the week and a bullish indecisive end.

For some people this shifts in pattern may mean nothing, but with this much uncertainty bouncing around this maybe indicative of a trend change. This is supported in conjunction with resistance at 870. What would really confirm this is if we see STRONG volume with a down day day early in the week.


With my analysis completed let me give you my summarized forecast:

If prices don't manage to reach 870 too quick I would expect another up week. If you get a strong close above 870 I would expect this rally to go longer than I had expected (into may). However, I really do not think that would happen considering the overall down trend of the S&P500 and the really poor fundamentals from the economy (though I express strongly, I am not saying economic health = financial market health).

With this in mind. Considering that 870 Resistance will hold, I do not think that this rally will continue to the end of second quarter. This 6th week definitely has room for another up week, though further than that is pushing it and I really do not think current sentiment would sustain the rally much further than that.

I would put a cautionary sign to those investing long term to be wary of media saying the bottom has occurred, honestly there are too many poor economic fundamentals to warrant any strong sustained growth in financial markets.

No comments:

Post a Comment

This Blog has been developed by Analyze Capital LLC, and as an independent organization we provide “AS IS” information without warranty. The ideas and opinions expressed by the contributers of this blog are personal and do not represent the actions or policies of Analyze Capital LLC. The contents of this blog do not intend to assert recommendations or to offer advice of any kind. We are not responsible the consequences, be they gains or losses, that may result from using any of the information from this blog.