Wednesday, June 16, 2010

S&P 500 - Up through the ‘roof', or just almost there

The day ended with many satisfied football fans as Brazil, the five time champions of the world, won their first game in group G against North Korea, though with some certain amount of sweating. Coincidentally, U.S. stocks also jumped as investors went on a buying spree. The Dow ended at 10,404.77 with an increase of 213.88 or 2.10% equivalent and the S&P500 closed at 1115.23, which is 25.60 or 2.35% higher. The move on the S&P500 is very significant, especially on the technical analysis aspect because it broke through the 200 day SMA for the first time since the down trend that started a month ago. This might be a possible indicator for the end of the downtrend.

From the chart, you can see that the price drop started approximately on the 26th of April creating a downward trend with the channel presented with the parallel red lines. The price reached the lowest point at around 1043 on 25th of May and subsequently bounced back. It must be noted that the level of 1043 (the green line) is a strong support level. After May 25th, the prices dropped and tested the support level one more time, which turned out to be strong. After the last dip, the prices surged and broke through the MA (200) and closed at 1115.23 for the day. This is very significant because it indicates a possible reversal of the downtrend. As it can be seen on the MACD, a cross-over of the fast moving line with the slow one happened almost after the last dip, which is another indicator that the trend is reversing. The stochastic and the RSI are looking good and do not indicate an overbought market. However, to further strengthen my position on the possible reversal of the trend, I have also tested the Elliot wave for confirmation. As you can see, the downtrend indeed creates 5 waves with the 3rd wave being the steepest. Now, I believe, we are in the ABC correction period with ‘A’ being the recent increase in price.

On Fundamental perspective, there is a high optimism on the recovery of the economy. Euro industrial production data were higher than forecasted. Although sovereign debt of the PIIGS countries remains an issue, the friendly demonstration by Germany and France, two of the biggest economies in the region proved that Europe can stand together as a union in hard time, which is vital for the stability of the block. Economists also expects that industrial production in the US for the month will be higher than May, which we will find out tomorrow at 8:30 a.m. EST. Alongside with the industrial data, also look for the Housing starts and Producer Price Index data, which will also be released at the same time. Also, don't miss the event at 10:00 a.m. EST!

In conclusion, in my opinion, the economy is giving signs that it is stabilizing. Technical analysis shows that the downtrend is on the verge of reversal, although I still expect some dips to come during the correction period. Fundamentally, things also look better although there are certainly factors that will cause hindrance to the recovery process, such as the debt issues in Europe and also the tightening of the financial policies by the governments and, of course, BP’s spill that can bring drastic changes to the energy industry. We shall see...

Luong T. Hai
Summer Analyst
Analyze Capital LLC

1 comment:

  1. Nice Analysis Hai,

    I will mention be wary of your time frames. For example, put this against a one week chart and the picture changes a lot. Also mind your time frames. I don't know to what levels you are forecasting and until when?

    I like your use of elliot waves, though Im not a big fan myself. But if im not mistaken, a 5 wave down and 3 up will mean a bear market?

    And looking in the frame of a weekly chart is that not confirmation?

    don't you love the subjectivity of technical analysis ;-)


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