Hi there, and welcome back to CRI's S&P 500 blog.
It has been a few weeks since the US mid-term congressional election and the FOMC's QE2 program launch. The market ran up into both events in a classic 'buy-on-the-rumor' and unfortunately it looks like we have begun the process of 'selling-on-the-news'. While there hasn't been any longer term technical damage done, it wouldn't surprise me if this 'correction' continues for at least a few more weeks. Irish debt, rising Asian inflation and a lot of supply of stock (GM IPO etc) are just a few issues the market is dealing with at the moment. And until we see some sort of capitulation, I won't be in a big hurry to be back on the long side from a trading perspective.
So lets go take a look at the chart to see where we might be heading [please refer to chart above]. This has got to be one of the more busy charts I have looked at in a while!
Lets start off with the longer term perspective - The move through 120.89 is significant from a longer term perspective as it represents a monthly double bottom breakout in the market. Stops on that monthly trade should be at or just below 100. While I am not taking this trade on (way too much risk for my liking) it is important for us to both recognize and appreciate what the market is trying to tell us. Specifically, the economic backdrop for stock growth going forward is OK (ie. yield curve is friendly, interest rates are low, and earnings are high). Additionally, there is still a lot of pessimism out there which unfortunately for the public is actually bullish.
Now the shorter term time from - Even from a weekly perspective, we are getting over-extended. The last major buy signal on the SPY was at 112.58. One should have stops working for that trade just below support at 103.73. This is all well in good if you did the trade (you are up almost 8 points or about 7%). The move up was ten weeks in duration and almost straight up. This straight line move up unfortunately has not given traders an opportunity to move stops. The current correction is the way for the market to find a new support line and once that is established then those that did the trade at 112.58 will be given a signal to move stops accordingly.
So where am I thinking this new support line will come in? To me it looks like we ought to be shooting for a move back towards the 111 to 113 area. As well as there being a gap at 111.09 that needs to be filled in, a 50% retracement of the most recent move higher would bring prices back to 113.34. Lastly, all three moving averages are bunched up tightly between 111 and 116.
In summary then, investors and traders were given a huge buy signal in the broader stock market in the middle of September when prices crossed back above 112.58 and the 13 EMA crossed back above the 30 SMA. For those that did the trade, look for a nice pullback in price and then a subsequent move higher to move stops. For those that missed it, look for the anticipated pullback to try and enter the trade at the original buy point (112.58) or after the market has consolidated for another few weeks and then breaks out higher.
Either way, if you are a regular reader of CRI's offerings then you will definitely here it from here...
That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
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