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