Working our way up into targets and resistance

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



As per my most recent posts,
'the market is moving higher and I am looking for that to continue...and'...because the 13EMA is higher than the 30SMA we must be looking for higher prices for the time being. Should that relationship change, then our 'Investor' stance will change appropriately.' I am and will continue to be bullish on equities going forward. However I must raise a cautionary note to any new readers and/or new investors. This recent rally is, in my mind, a classic 'dead-cat-bounce' that has taken us from 'the brink' back into resistance. THIS IS NOT A BULL MARKET. Please understand this going forward.

This week I thought I would include a chart of the market (expressed through the S&P 500 depositor receipts, SPY) with an overlay showing the waves of this bull run (blue dotted line). One technician, R.N. Elliot, theorized that bull market moves happen in three waves. (learn more about Elliot wave theory on Wikipedia here). Considering where our target box is, a final climactic 'blow-off' top into the 120 area seems to make sense. My hunch is that will happen some time in the first quarter of 2010. That is several months away and I think a realistically achievable target. In the short term however, the market has moves substantially away from both the 13EMA and the 30SMA suggesting there is a growing risk of a short term correction. Since there are annual profits to be had by selling stock, investors may find a last minute 'rush to the exits' correction occurs because of nothing more than tax reasons...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Bounce off the bottom

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



As per my most recent posts, the market is moving higher and I am looking for the market to move even higher still as we head into the end of 2009. Because the 13 EMA is higher than the 30 SMA we must be looking for higher prices for the time being. Should that relationship change, then our stance will change appropriately. Specifically the 120 level looks like it will represent the next significant resistance area as the upward pointing channels and the 200 weeks SMA are both in that vicinity.

This week I thought we would take a look at the market from a little longer time frame. Above is a 3 year chart of the SPY (S&P500 Index depository receipts - in essence, our best/easiest/least cost proxy on the US stock market). There are three things that jump out to me when I look at this chart and I thought we would take this week to review.

1. The bear market 'sell signal' was flashed back in Oct/Nov 2007 (The Weekly 13EMA crossed below the 30 SMA on Nov. 12th, 2007). Subsiquently the market put in a weekly double top and confirmed this formation the first week of January, 2008 when it moved below 135. So there is no doubt about it, 'the financial crisis' was telegraphed and anyone who was paying attention should have been properly positioned.

2. The bull market 'buy signal' was flashed back in early May (the week of May 4th, 2009) when the 13 EMA crossed back above the 30 SMA. The market later confirmed this signal when (in the week of July 20th) price 'broke-out' registering a bullish Flag-pole formation. Again, through the late spring and into early summer of 2009, it was clear the market was moving higher and that the bear slide was over for the time being.

3. The bear slide (from peak to trough) was almost exactly 18 months in duration. During that slide the market lost 56% of its value (from 151 to 66). The subsequent rally has been almost exactly 9 months in duration (about half of the bear market period) and has rallied about 70% - but more importantly - has rallied almost exactly 50% of the bear slide value. So the recent rally has been at almost exactly the same pace as the sell-off. Who says the market doesn't move symmetrically...

Conclusions: Nothing I have seen in the past few years leads me to believe that there is anything different to this current market vs. previous bear markets. Prices fall, then bounce, then retest the lows. Currently we are in the 'bounce' phase and I do believe that is nearing an end. Investors should temper their enthusiasm since we are still very well contained within a massive bear market and within a few percentage points of significant resistance.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Upside Targets Start to Emerge

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



As this up move in the market reaches into its 8th month one gets the impression things are building to a climax. Government stimulus measures have been enacted, economies have responded and talk of new bubbles in some areas of the world have begun in earnest. With that being said, the charts have suggested being long the market (our signal line being when the 13ema crosses back above the 30sma - which I have talked about at length in previous blog entries) and are NOT flashing sell signals as of yet.

While I have suggested in my most previous blog entries that the market wants to move higher, I myself have been relatively neutral since we hit the two previously prominent upside targets (the gap at 107.5 and the 50% retracement level at 108). I continue to lean towards wanting to exit the broader stock market as I believe we are in the 7th or 8th inning of the most recent bull run. But just because we are near the end, doesn't mean we are at the end... So with all that being said, lets take a look at what is happening and consider what might happen given the market's recent bullish price action.

Indeed, now that the market has consolidated its recent gains and broken out higher, those previously significant resistance levels may now act as support going forward. Additionally, we have now established a secondary uptrend channel (Marked B. in solid blue on the chart) within a primary uptrend channel (Marked A. in light blue on the chart). This all points to a serious test of the 120 level in the not too distant future. As well as being the conjunction of two trend lines (the upper of B and the lower of A) the 120 area is where the 200sma currently sits. Notice the lows of early 2008 are also in this area too.

As far as I can see, its business as usual for the stock market...

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Grinding higher and heading into traffic

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



As per my last few posts, the market continues to point higher - the 13 EMA is still very comfortably above the 30SMA suggesting higher prices are still ahead. The conservative adviser in me suggests one ought to be looking to take profits on positions picked up into the 2009 panic lows. The market has completed a 50% retracement of the entire two year bear market (by trading back above 108.755) and has filled in a very rare Gap on the weekly charts at about the same level. The 'easy' part of the dead-cat-bounce' phase of the market is now behind us and one ought to be very careful about having too much money on the long side of the market.

Since we are still in a bullish stance, upside targets ought to be considered going forward. As well as heading into a high traffic area on the chart (between 120 and 130), there are two significant technical targets in that area as well.
1. The bull flag pole formation target is currently at 125
2. The 200 period SMA is at 120

I expect this area (120 to 125) to represent the next major hurdle for the market as we head into 2009 year end. Since the EMA/SMA relationship is still pointing bullishly we have no choice but to keep looking for higher prices ahead. Once this relationship has turned negative we can look for prices to head back down but that seems to be a while down the road yet.

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Inverted Head & Shoulders on S&P 500?

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



Considering last week's commentary has changed little over the past five trading sessions, this week's chart on the SPY will look at a common price pattern that every trader (novice or veteran) should be very familiar with, the inverted Head & Shoulders Price Pattern.

As the chart above illustrates, the inverted head & shoulders price pattern is the classic head & shoulders price pattern turned upside down. Here the market sells off in a series of three spikes lower. The second being the most dramatic (head). Should the market rally back above resistance (neckline) there is a high statistical probability the market will carry on an equal distance (from head to neckline) higher. In this case, the market spiked lower to form the 'Head' at 66.31 (in March '09) then rallied back into resistance which formed the 'Neckline' at 99.65 (by June '09). The subsequent breakout through the 100 level suggested that what once was resistance ought to now become support. As well, it suggested that there ought to be a subsequent move back up into the 125 area.

Upside targets have been
1. a 50% retracement of the entire two year bear market move to 108.755 area (refer to previous blogs for more on this calculation).
2. The weekly gap needed to be filled in at 108.

Now that these primary targets have been hit the easy part is over. The classic 'dead-cat-bounce' has played itself out and it is now not a question of 'when' the market will move higher but really 'if' there is much more in the tank.

Since our simple (yet very effective) moving average signal (13EMA vs. 30 SMA) is still quite bullish, we must remain bullish. Should that relationship change we will change our stance appropriately.

With the above in mind, our next (and far more risky targets) are:
1. the 200 period SMA (which currently sits at or near 120).
2. the inverted head and shoulders price pattern target at or near 125.
3. And ultimately, the top of this very steep price channel (refer to last week's chart for the channel) at or near 140.

My hunch is we are in the 7th or 8th inning of this dead-cat-bounce so I shall be reluctant to put on new positions until a correction in earnest occurs. Yes, I will be looking for the market to move higher over the coming weeks but I just don't think its worth the risk...but I'm just conservative that way. :)

That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

Tired yes - but no weekly top yet

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



As I have commented on repeatedly of late, the broader US stock market (as measured by the S&P 500 stock index) has made an appropriate 'technical' bounce off its winter 2009 lows and is now beginning to look a little tired. There were two significant weekly technical targets (a 50% retracement of the entire 2 year bear market move and the very rare weekly Gap) near the 108 level and both of them have now been hit.

As per our very conservative (yet very reliable) moving average signal (13EMA vs. 30SMA) one should still be looking for higher prices in the weeks and months to come. This indicator turned positive last May and there isn't any sign of it turning negative in the short term. Having said that, we have recently broken through the bottom of the very steep uptrend channel (established when prices broke higher in the end of July) so one should be very reluctant to add to new positions until either a tradable double bottom comes in, or prices break the highs from three weeks ago. If that does indeed happen (and that is a very big 'if' right now) upside technical objectives would be the 200 SMA (currently near 120) and then the top of the price channel (at or near 140).

For those of you who believe such a rally couldn't happen, just take a look at the S&P 500 from the period of 1974 to 1976 (highlighted in the October issue of The Canadian Rational Investor newsletter). In this brief two year period the S&P went from 1100 to 670 and then right back to 1000.

While completely illogical, we must always be cognizant of the old saying: "markets can remain illogical far longer than any of us can remain solvent".


That's all for this week,
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com

The next 10 SPY point are going to be very tough

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



The market has moved up nicely from the lows of last winter in classic 'dead-cat-bounce' fashion. After registering a buy signal last May (13 week EMA cross back above 30 week SMA) the market was poised to take back some of the previous two year's horrendous losses. Two significant technically bullish targets on the SPY have been met (the 50% rule of the entire bear move and the very rare weekly chart gap; both near 108) and the market is (as suggested over the past few weeks) looking very tired. Since the moving averages are still positioned bullishly one must remain bullish and look for further price appreciation. Should we get a further push higher in equity prices over the coming weeks one ought to expect significant resistance to come in near the 120 area on SPY. That is less than 10% higher and I might suggest that this is the area investors should get cautious and not greedy. Once the current Obama euphoria is gone, I fully expect prices to test (and probably go through) the lows we saw last winter as this recession plays itself out...

But the market has not rolled over yet so lets consider where the market may move to in the short term. I believe 120 shall represent a line in the sand for the stock market because of three reasons. 1. The bear market trend line that started more than two years ago sits in this area (red line on chart), 2. The top of the recent up channel is in this area (blue line on chart) and 3. The 200 week SMA (now pointing downward!!) is in this area.

Fundamentally, the market is trading again at very lofty PE ratio levels suggesting earnings are not supporting this recent move higher in prices. The perception of 'panic' in the financial system has eased and further support for equities from public sources seems to be waning. 10,000 has been breached on the Dow and investors are feeling like everything is alright, sounds like its time (or nearly time) to start thinking short again....