Sunday, April 26, 2009

S&P500 Weekly Commentary - April 26, 2009

*Skip to Summary at the bottom to see forecast

Week 8 of the bear market rally: Which way will the trend trade? Will next week be a down week (lower low), an up week (a higher high), or will it be neutral...

Summary of Performance for week 7:

I would like to point out the 870 resistance I have been calling for the past two weeks now. It appears to be much stronger in the short term as the past two weeks failed to break above the resistance level (870). Friday's intraday showed highs of reaching above 870 however the close was well below this. This level has been tested twice and is holding as a strong psychological level. Overall, Monday showed that negative sentiment carried over from the previous week as the day turned out a large dowwn day. Also the key level of support at 835 was broken, which questions the strength of this rally.

Overall I'm quite surprised with my past week's analysis, as I thought I was going to be totally wrong after seeing Monday and Wednesdays drops. However it seems that the end of the week did show a return to bullish sentiment, however leaving the overall week uncertain.

My forecast from last week was that i expected an up week, however this did not occur. Though I may have been wrong in that respect a weaker bullish wave did indeed occur.

My other call:

"As I said in my analysis I expect prices to dip early in the week (Wednesday or before), and will be looking at 835 as a key support level to maintain bullish stance for this week. "

was a much better call, as early week (monday and wednesday) were both down days (though I was a bit shocked to see right off on monday that 835 support was broken). I had made adjustments to my view during the week as I had no time which was the right move. If I had read too much into the break on 835 support I would have missed the possible retest at the 870 level.

Charts to consider for this week:

Chart 1: Here is chart that should be viewed in the longer term. It is a weekly chart of the S&P500, and shows bullish and bearish indications (read analysis for explanation).

Chart 2: Another weekly chart presenting a more bearish case:

Analysis: Let us consider the bullish scenario and bearish scenario to see which arguement may be stronger to forecast next weeks price movements.

The Bullish Scenario:

Looking to chart 1 shows some of the evidence to see week 8 of this bear market rally to be neutral to bullish.

The Technical:

I will use the 20 SMA, RSI and MACD as evidence to show that there is room for this week to end on a bullish day or possibly above resistance.

20 SMA:

I retested 20 SMA retested looking at where prices crossed above and under the average. Currently, prices would have to get a few good closes below this 20 SMA for this to be bearish. However volume may not be significant enough for this occur for the week (other sentiment indicators will be used to see if there enough bearish sentiment to push prices below the average). So with mild volume (look to pink line on chart 2) this support for a bullish scenario.


Looking at the RSI at the top of chart 1: it shows that for the past year and 4 months the RSI has not trended above the 50 level. Though in May 08 levels above 50 were maintained for more than a month or so before the huge drops in price came. This may indicate room for prices to continue upward in the short term (over next week), as the index is neither oversold or overbought.


The MACD is showing similar possible signs on chart 1 (remember this is the weekly chart). There is room for the averages to converge throughout the week as they are near each other for a cross over. Though, once the longer term crosses over the shorter term average, this will of course be bearish. Though overall, they have yet to converge at this point.

I will leave Volume out of the analysis as it can be spun to be neutral/bearish.

Fundamental View:

Economic Health:
Last week's economic data was nothing the financial markets were rallying for. I won't bother going into the details of the data such as for housing and unemployment... all just stinky.


Though the only thing that can further support this rally in the short term would be earnings. And I emphasize short term as ridiculous "surprise" earnings from citi, are not substantial improvements from a fundamental standpoint. When expectations are so low and the amount of money the government is throwing on them it really should be no surprise that earnings would "surprise" if you can catch my drift...

The point being for earnings is that, if we get some big blue chip getting more "surprised" earnings, I'm sure we will see some people jumping on the temporary bull train upwards.

Small Cap, vs Mid Cap, Large cap S&P500? :

I was considering at looking at the difference between the different S&P benchmarks between the smallcap 600 vs. midcap 400 vs. the largecap 500. I haven't done much thinking on this, but I wonder if there can be some clues that can be found to support a bullish or bearish move. As I stated before on the S&P500 you have key resistence at 870, there is similar resistence found on the mid cap and small cap (530 and 250). Both these resistence levels have been broken. However it seems that he largecap S&P500 is having a hard time breaking resistence. As the small and midcap progess higher above resistence, perhaps this may indicate that the larcap will also be able to follow suit? We shall see...


The only sentiment argument I can think that would help this bullish scenario is positive earnings, unfortunately my expertise does not go that far... In addition, the VIX index call/put ratio is still relative bullish, though on monday and wednesday, the down days of last week the ratio was almost = 1 (neutral). Currently it is more bullish at .68.

Summary of Bullish Argument:

The premise of the bullish argument lies in that there is enough sentiment to carry on a bullish move in the short term, despite the increasingly bearish indicators. Due to this bullish prediction, it would have to indicate a solid break on 870 resistance. This level is significant in that it was tested twice and failed, so if it can close strong above it it shows the strength of bulls. Hence this would confirm the bullish scenario presented above. However this move would have to happen early in the week.


The Technicals:

I will consider Resistance, the 50 and 140 SMA, volume, and possibly the RSI.


I know I've been harping on this for awhile, but here it is again. As the levels were tested twice it is not probable that prices will retest for a third time. I know a many who do not believe in triple bottoms or triple tops. Though the later can be argued for it is unlikely. EVEN if 870 is broken, real support may lie at 877 ( I will refer to economic reports and sentiment as evidence that will not allow for such a move).


The SMA's for the 50 and 140 remain above prices indicating continued downward pressure. This is part of the reason why I am still bearish for the year 2009 on the S&P500 (long term).


On the weekly chart this is more significant vs the daily chart in the same time frame. However, it is still not that considerable, though one can argue there is a break in downward volume trend, along with a higher down day volume spike (this is not significant as it is not much larger than previous down days despite a break volume trend).


As the RSI approaches the the 50 level mark, some will be questioning like me whether this is indicating to be bearish or bullish, over the longer term a few weeks, this is definitely more bearish, however, if sentiment is more bearish we can see a downturn on the RSI earlier along with prices as well.

With that in mind, lets turn to Sentiment:


As stated in the bullish argument so it may weaken this RSI argument for the bearish scenario this week. However, I will point to last week with economic data. It was possible that economic data may have not been priced in hence we saw drops on Monday and Wednesday. Considering this, investors maybe looking at a variety of indicators next week, from FOMC meeting, GDP, Jobless claims, farm prices, factor orders.. etc... If any of these are not priced in the market it possible another lower low will be sparked.

Summary of the Bearish View:

The Bearish View hinges on resistance at 870 and 877 holding. If resistance is not broken I will be important to look to volume any any down days. If next week is a down week (with a lower low) then this is just a continuation seen from the 140 and 50 SMA.


As a higher high and a higher low was failed in the previous week, one has to seriously consider the bearish argument. Though Voulme is not very convincing, the end of a week may revisit levels in the 830's (I will maintain this as my forecast). What is very risky to this bearish scenario is priced in sentiment along with bullish indicators listed above. However, as 870 resistance was tested twice I do not think the bullish trend will break resistance for this up coming week.

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