Hi there,and welcome back to RI's S&P 500 blog.
We here at The Rational Investor have been looking for a test of the winter lows some time here in June and we have now indeed got it. Unfortunatly, the market did not pass the test and has now confirmed a rather bearish looking chart pattern on the SPY.
In a classic Bear Flag formation, the market fell from $150 (A.) to $125 (B.) very quickly. It then consolidated back to $143 (C.). If the market breaks point B. (the low of $125) then one must look for a continuation of the first move - in this case down to point D. (at or near $118). As well, the break of the winter lows at $125 confirms the rather wide downward pointing trend channel (red and blue lines) which also happens to suggest there is support at or near the $118 level.
The SPY (and by default the broader US economy) is suggesting the weakness seen over the past months will continue for some time into the future. the US economy is in contraction - earnings are in contraction and costs just keep going up. Indeed, financial stocks have yet to bottom in earnest and energy prices have yet to top.
At best the market shall remain range bound between $118 to the downside and $143 to the upside for some time to come. At worst, we continue to trade to new lows building more and more resistance into the price charts.
Yes the market is very oversold in the short term (and a dead-cat bounce could take us right back up into the $140 area on the SPY). If that is to happen we need a reversal sometime within this week or early next week. More importantly though, the longer term implications of this significant technical failure suggest we are now firmly within a period of price consolidation rather than expansion.
Not the best report to make but hey, I gotta call 'em as I see 'em....
Brian Beamish FCSI
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