S&P500 Weekly Market Commentary, July 6th, 2009

Chart 1




Chart 2




Chart 3






WOW my gosh, these are some of the most interesting charts I've seen on the S&P500 in awhile, the amount of conflicting patterns indicators and trends are making my head spin. These apparent mismatch of signs are clearly reflected in the bull/bear fight that has been going on. The markets have been undecided as to where to take the S&P500 over the past two months.

One thing for sure a big move is on the way whether it be up or down.

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The best part about technical analysis is the interpretation. One can interpret charts in so many ways, and clearly today's chart exhibits this.

Firstly I will point to chart 1:

For the past two months the S&P500 has been trading in a sideways range of around 877 and 956. This is clearly showing markets indecision of recovery is really hear or if the markets should head lower. This blog entry will go over both bull and bearish arguments from a technical perspective.


BULLISH ARGUMENT:

• Support at 877 has held for the past two months


• The 200 SMA is still strongly under price action <--- quite compelling


• The two bottoms on June 23 and July 6th are higher lows (893 and 898 vs lows from may 15 and May 22, 882 and 887 respective)


• Given that support holds the RSI bottoming soon will be inevitable unless you get over exuberance in negative sentiment and RSI gets oversold (though back testing the RSI shows that even in high crises mode the RSI only dips to oversold levels a briefly; 3-4 times over the past two years; and currently sentiment doesn't point to a strong negative oversold moves)


• Last but not least I point you out to chart 3, a failure of bearish sentiment July 9th (today), right above support levels. The bears fought really hard as seen by the long lower shadow, but however bulls regained step by the end of the day.


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BEARISH VIEW: (I will have to say the bearish view presents equally compelling evidence)


• I will point out volume first; some basic back testing on volume shows that this current volume trend may be quite bearish. Looking at the bear market rally in early march we see an abnormal spike in bullish volume (see chart one - around march, the first blue circle). As follows the volume trend peaks off and we get a full out rally in this time frame (March all the way to mid may). Then we get another huge abnormal spike in volume, but in bearish volume (second blue circle mid may), and as follows the volume tread peaks off, however leading to an indecisive market. Considering the spike in volume was bearish and abnormal this may show that a downward trend is about to start forming.


• Scarily, we get a pretty strong confirmation pattern inline with the volume trend. Looking at chart two, we see a pretty clear head and shoulder reversal pattern. What is key support is in the bullish argument, will be the confirmation bearish sign; as if prices go below the neck line we may get a full out trend reversal (I don't have much experience in pattern analysis, but this seems pretty cookie cutter text book to me).


• back testing on the MACD shows that prices can go much further; if prices do break support at 877, I see new support levels anywhere between 800 and 877 as shown on chart 2. This leaves a huge skew on risk/reward profiles (quite dangerous to trade the S&P500 right now).


• given worse case scenarios I see a risk/reward profile of about 12.25/6 . A potential gain of 50% of what could be lost! (given 952 as the resistance level seen in chart 1). This is not very appealing at all for the bull's.

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CONCLUSIONS

If one were a brave soul given the risk/reward, he or she would be shorting the S&P500. For myself, I would do no such thing as there is short term potential upside as seen in chart 3 (green circle). Today's (July 9th) sentiment was positive; good confirmation would be to look at 1. the vix and or 2. the S&P500 futures (no time to go look at these, I need sleep!).

Looking at the SMA's;the long term seems to paint a bullish picture with the 200 SMA strongly under price action (this contradicts my long term bearish stance on the S&P500; perhaps I got my analysis backwards and it is more appropriate to be short term and medium term bear and long term bull; which would mean we are in recovery mode thus confirming green shooties! WHAT!? <-- lets hope that I certainly am not wrong about being bear long term since I totally do not agree with what these green shoot economist are saying!)

All in all if one were to play this as a true technician, it would be appropriate to be more bearish short and medium term, especially with confirmation from the 50 SMA being above price action and the 100 SMA being below the 200 and 50 and well below price action.

For my forecast:

I will sit on the side lines and wait for a clear trend to develop before making a full out stance. Though I will say this for price targets:

Bearish: 800-877
Bullish: 952 (1000+ if we get a break in resistance!)

This will be a very interesting week.

-Alex