Eighth week of consolidation leading to a change in primary trend

Hi there, and welcome back to CRI's S&P 500 blog.

For the past eight weeks we have seen the broader US stock market flounder as it comes to grips with the notion that the US Fed will stop flooding the market with cash. The end of QE2 has been met with a literal stop to any and all new purchasers. Last week's blog entry suggested that the market needed to rally a bit to relieve its oversold condition and that the 130 area seemed like a reasonable target. Indeed, as the market headed into the 2 day FOMC meeting (held last Monday to Wednesday) the 'dead-cat bounce' was fully underway and the market did rally into the suggested target zone. Upon the completion of the meeting (and more importantly the announcement of no new QE3 program) the market topped and then failed miserably into the weekend. So what can both traders and investors take away from this past week's price action?

Traders: Since the 'outside-downside' bearish price pattern registered just three weeks ago, traders have been well advised to be flat and watching from the sidelines. Considering the steep sell-off, I still wouldn't be surprised to see a bit more of a rally before one considers going short aggressively. So, as was the case last week, traders ought to be sitting in cash and watching.

Investors: Here we have a potential event that warrants attention. Since last fall's breakout, investors have been well advised to be long (and stay long). The market slowly worked it's way higher as our time tested 'investor signal' (that being the relationship between the 13 EMA and the 30 SMA) had been comfortably bullish. That may be about to change. On the failure last week, the 13 EMA is just a fraction above the 30 SMA and unless there is some sort of explosive rally coming, that relationship will turn negative for the first time in six months. While I am reticent of jumping out too soon, investors would be well advised to pay close attention to this important relationship and more importantly - for a change.

So if the market continues to consolidate, where might we be heading? As the chart above suggests, there is a lot of evidence to support the notion that the market would like to work its way back down into the 110-115 area. Three technical indicators suggest such an event. 1. The 200 SMA is sitting at 111.65. 2. A 50% rule of the entire bull move (from June 2009 to now) suggests prices want to come back to 110.09. 3. The bottom of the very well defined price channel sits in and around the 115 area. 

Ironically, this target zone  is within a fraction of where it broke out last fall, suggesting that the last six months of rally was for nothing. Additionally, any new QE3 program will only be initiated when the market is looking to be heading into free-fall. I might suggest that these two events will coincide - When the market makes its final push into the target zone - macro-economic will force QE3 and the market will stabilize once again....but that is just a theory for now.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Seasonal top leads to healthy correction

Hi there, and welcome back to CRI's S&P 500 blog.

As has been the case for many weeks now, we here at CRI have been looking for some of the steam to come out of the market given the typical seasonal pressures that are at work through the end of the spring. The old cliche, 'Sell in May and walk away' has indeed played itself out - and as a result prices have fallen appreciably. The question now is, is this a normal healthy correction within a bull market or is this the beginning of a new bear cycle. 

As was noted last week, I am more than happy with the notion that this latest bearish price action is nothing more than a normal (healthy) correction within the framework of a rather large bull cycle. Considering  the yield curve is still quite healthy (where long term interest rates are still higher than short term interest rates) I don't see a reasonable case to be made of a pending recession. Consider too that the current bull cycle itself seems to be pointing towards a climactic peak some time in late August/early September (as a trader ) I am not ready to short the market but rather to sit patiently on the sidelines and wait for a new long entry. Investors on the other hand, should be quite happy to sit in their long positions and patiently wait out this latest bearish action. Of course, should our time tested 'investor' signal (that being the relationship between the 13 EMA and the 30 SMA) turn negative, that stance will have to change. It is still very positive so again, investors ought to just sit on the long side and enjoy the nice spring weather.

So what should one expect over the coming week then? I myself wouldn't be surprised to see a nice 50% retracement of this recent sell-off. We started the latest push lower about a month ago with a nasty outside-downside bearish engulfing pattern where the high was 134.26 and we worked our way down to 125.7. With these numbers in mind, I am looking for a bounce back into the 130 area [50 rule; (134.26+125.7)/2 = 129.98]. The peak from 6/14 was 129.77 and I bet the pro's are going to go fishing for the stops in and around that area. Also too, keep in mind we are (as of today's writing) into the 2 day FOMC meeting and traders love to play with the market into such events. Once the announcement of their decision is made - the market ought to resume its 'normal' trend.

Considering there is much speculation about if there will be a QE3, one ought to expect this debate to drive the trade until they are done their meeting. My hunch is, they will only start QE3 with the proverbial 'sh*t hits the fan' - as long as the market isn't tanking - there will be no QE3. Once the market starts to tank - then they will consider action. Adding in our cycle analysis (suggesting there ought to be a pivot at the end of the summer) my hunch is that debate will not begin in earnest until the fall - no pun intended. Considering too that current medium term market support is still a good 10% lower than where we are now (1 year 50% level, 200 SMA, and trend channel support) a climactic push into that correction zone (highlighted by the box on the chart above) will probably coincide with the announcement of QE3 which will coincide with that bull cycle end. But that target is still off in the distance and as is always the case - we will cross that bridge when we come to it.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Natural progression of stock market cycles

Hi there, and welcome back to CRI's S&P 500 blog.

For the sake of breaking the repeated message for the last while - when in May, blah blah blah, I thought we ought to take a good look at where we have come from and where we may go if indeed we are entering a corrective period. 

First off, lets start by appreciating how symmetrical the market is. If one starts with the massive upward channel (double black lines) and then uses the end of July, 2010 as a pivot, one sees how we have gone through a 26 month cycle (double diagonal red line) from trough to peak. The 26 month cycle comes to an end in September, 2011 and suggests we will have to go through a new 26 month cycle after that. Regardless of weather the new cycle is up or down is not relevant here, just the appreciation for the fact that we are at an end of a cycle - not the beginning.

Alright, now back to the present...

After yet another failed rally attempt, we are now breaking support of the most recent bullish uptrend. Last week's bearish engulfing pattern has led to further weakness. The most recent 'stop' point (129.51) for traders has been broken and traders should now be very comfortably on the sidelines. Investors can still take comfort in the fact that the 13 EMA is still well above the 30 SMA suggesting we are still in a correction of a bull market. Should that relationship change, investors will be given the exit signal and we will officially end the bull market.

Now if we do continue to 'correct', where might we go? The most important number that jumps out at me is the good old 50% rule. A one year 50% rule suggests we ought to look for prices to pull back into the 118.40 (point 2.) area and a two year 50% rule suggest we ought to look for prices to pull back into the 110.60 (point 3.) area. This bracket (118 to 110) ought then to be a realistic zone for correction. Further supporting this argument is the fact that both the 200 SMA and the bottom of the massive channel (double black line)  are currently comfortably in this zone too.

Since our last 'investor' buy signal (110 area) the market has advanced more than 16% so all those that did do the trade should still feel very good. Should the market roll over here (and we do get an 'investor' sell signal) there shouldn't be too many complaints. But we will cross that bridge when we come to it.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com

Traders getting nervous, Investors still comfortably long

Hi there, and welcome back to CRI's S&P 500 blog.

The time tested cliche, 'Sell in May and walk away' has once again put a seasonal top in the broader US equity market (as measured by the S&P 500 index depository receipts - SPY). This top comes after an impressive 30% rally since the US mid-term congressional elections just last November. While the market has yet to break down in earnest, traders should be nervous. The rally has failed twice at the top of the trend channel and is now in the process of testing key support at or near 129.51. Should that level fail, our next support level comes in near the 125 area.

This latest bearish move in equity prices (an outside downside key reversal no less) has came on the heals of a very poor May US Employment report issued last week. It suggested far fewer people found work in the US than had been expected and points out how this 'recovery' has not been broad based. Since we know that the yield curve is still rather healthy (with long term interest rates still well above short term rates) one doesn't have to worry about the prospects of a recession any time soon. So then what kind of correction are we talking about here? A natural 50% correction (of the bull ran that started last fall) seems most likely to be expected. Indeed, a 50% correction of this bull run would bring prices back into the 118.5 area and would clean up a lot of the excesses built into the market over the past seven months.

Traders will be watching the important low from the week of April 18th at 129.51. Should this level be broken one ought to expect a move back down into the 125 area and then should that area fail an ultimate move down into the 115 area.

Investors ought to just sit tight for the time being as our time tested 'investor signal' (that being the relationship between the 13 EMA and the 30 SMA) is still very much in the bullish camp.

In summary then, at worst one ought to expect a quick violent move back down into the 115 area and at best we will slowly move down/sideways into the 120 area. A 50% correction of the entire bull run brings prices back into the 118 area and I wouldn't be surprised if that number is hit over the coming weeks/months. Either way, it would appear we are starting to clean up the excessive bullishness of the past seven month post mid-term US congressional election rally.

That's all for this week,

Brian Beamish FCSI

The Canadian Rational Investor

the_rational_investor@yahoo.com

the-rational-investor.com