Sunday, July 15, 2012

The State of the S&P

Ok, so a few notes on the S&P as we await next weeks open.  We had ourselves a little panic, as predicted.  If you remember my chart of the S&P from the post "Long way down"  back in late April, we knew it was coming.  The S&P's numerous QE induced rallies all had certain things in common.  When they broke their up trend lines it always corresponded with weekly MACD turning lower.  The result on each instance was a nasty move down.  This past one followed the exact same format.  The only question left now is, is it over yet?

Above we will start with the daily chart which erased all of last week's losses on the single move it had on Fri.  There will likely be some follow through on that.  It appears as if it has made a bottom and is attempting to trend higher.  From this we can see an upwards bias with a logical target at the major resistance point and upper trend channel line near 1400.  MACD has just about turned back up after a slight dip below the signal line.  It remains above 0 which is bullish.  That's pretty much the long and short of it involving the daily chart.

What I want to focus on on this is the weekly and the monthly.  The weekly is what gave us the signals to see this past sell off coming so lets look at that.

All though the ability to hold an upwards trend so far is good, and the long tail on last weeks candle, which even managed to turn green is encouraging, there is nothing to write home about yet.  MACD looks as if it wants to hold above the 0 line and cross over the signal now, but this is the same move it attempted last summer before we had one final, ugly spike low to shake out the last of the weaker hands.  We also did not test the lower trendline, which isn't necessarily a bad thing, but it does leave some air below us, so consider what you COULD lose before getting too excited.  The most important thing on this though is the volume.  As predictable as possible.  We can see spikes in volume that typically precede bottoms by only a few weeks.  From there, volume trends lower as price moves higher.  When price breaks up trend line, sell off ensues.  Sell off bottoms shortly after volume spikes.  Lather, rinse, repeat as needed.  This occurred at the major bottom in 2009.   Volume declined as price rallied until it spiked higher when the market sold off in Spring 2010 (Flash Crash).   Price found bottom, trended higher, volume trended lower.  Price broke trendline in Spring 2011, market sold off.  Volume spike lat Summer 2011, price bottoms shortly after.  Price trends higher, volume trends down.  Price breaks uptrend April 2012,  Market sells off, volume...does nothing.  No notable move higher.  In fact, volume for the sell off was near the avg it had been for most of the rally.  This has me asking, was that the bottom?  My guess, No.  Which means we could still see our bottom, accompanied by a volume spike and a test of the lower trend channel.  Which unfortunately is currently at about 1225, and that indeed is a long way down.

Ok, so we got the daily saying short term target of 1400, the weekly saying maybe a test of  the 1225 area in a more intermediate term, but what about the long term?  We know the S&P is currently about a little more than 10% away from its all time high...We also know because we are not morons, that the US and for that matter WORLD economy is far from 10% off its all time high.  So there is a divergence, which I have explained before will continue and be based solely on currency devaluation compensation.  Earnings support my theory.  Coca Cola might be earning 10% more than they were 10 years ago, and therefor their stock price is up, but can they buy any more with that 10% more money now than they could then?  Probably not. I know one thing, the price of a coke is more than 10% higher than it was then.  so could we see 30k on the Dow?  Of course, it will coincide nicely with about 50 on the US dollar index.  I digress, lets just look at the chart shall we?

Don't ever dismiss the monthly charts.  This picture is 20 years in the making.  Although as I said, we could see 30k on the Dow, I would expect this massive consolidation after a big move higher to break up, but lets just look at whats happening now.  We can see MACD is trending lower and butting heads with the down trend line.  Both MACD and the signal are about flat.  They remain above zero which is a plus but we need to consider, that if the weekly does have another move down, the MACD on the monthly could cross lower as well and make any sell off that comes, that much deeper and more painful.  We can see from the Fibonacci lines that the next big level doesn't come into play till just above 1000.  That would hurt.  A LOT! And it would likely signal a recession.

Now, let me say I don't think that that will happen to that extent.  We live in a crazy world cause this whole thing can be turned to look completely different with just a few words from Ben Bernanke.  (or a few letters for that matter).  I believe that will happen sooner than later.  Sept by the latest I'd say.  But we can't dismiss these charts and simply invest based on hope that he'll print.  Betting on that is betting, not investing.  So lets take all these things as they are and figure this; The S&P will likely test 1400 soon, from there, a failure to move higher could spell out trouble and we could see a move to as low as 1225.  If Bernanke doesn't print, we could see lower than that.  Prepare for the possibility.  Are you comfortable in you positions?  Square them away in the event a move lower does ensue.  Leave yourself room to breathe and in the event this takes down gold to a spike low say at 1450, be prepared to buy physical with both hands.  It, won't last long.

As I said, I don't expect a catastrophic sell off.  Things are different then in 2008, Bernanke can react with what he knows works faster, and he will.  But at least know the risks, and watch those longer term charts they've served us well in the past.


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