June 2nd, 2011

Technical Supports to Look For

The last couple of days has been a really scary ride. On Monday, the market climbs 1.06% and looks as if it’s finally cleared the upper boundary of a lateral channel in which it’s been trapped since February and today, the market comes crashing down 2.28%, back down below both the 50-dma and 100-dma’s.

Yesterday, all the “talking heads” could speak about were the stocks that had finally moved higher, all the industries that have positive momentum, how the tragedy playing out in the EU with the Greek bailout has little to do with our markets, etc., etc., etc. Then, today, about all you heard was that the disappointing ADP survey (which has a notorious history for being wrong) could be the catalyst for launching the long-awaited 5-10% correction. Investor sentiment has been getting a little too bullish and that “wall of worry” needed a few more bricks placed on it.

But let’s step back from the day-to-day fluctuations to see whether, in the longer-term picture, momentum has actually already been damaged and, if so, how much (click on image to enlarge):

While I can’t predict what the market will do tomorrow, I’m still operating under the assumption that the trend is still in tact, albeit bruised. I set up a number of “hurdles” or milestones to guide my strategy as the market came out of the 2009 Crash Bottom. Today, there are several supports that would have to be broken for the game plan to change from offense to defense:

  • The market would have to cross under the bottom boundary of a long channel ascending from the 2009 bottom. That trendline connects and extends from the March 2009 bottom to the August 2010 bottom. Right now, the market is just 10 points above that trendline.
  • If the market continues lower, the 50-dma will follow the Index itself and cross under the 100-dma; we last saw that alignment last July through September 2010.
  • If the market moves further down, there is a potential neckline at around 1265, the low in March. Should the market touch that trendline then 2/3 of a potential head-and-shoulder reversal top would be put in place.
  • If the market does continue to decline all the way to 1265 then it will be close to crossing under the 200-dma, an extremely bearish event.

A cross by the Index under the 200-dma would indicate that the trend has clearly turned bearish for the first time since 2009. I don’t think that will happen. I still have faith in the resumption and successful completion of the “mid-term election cycle” market that began in November and, if the market follows the historical precedent, should end at around 1500 by year-end. But, I must confess, I’m going to get more and more cautious if (as) the market approaches that 200-dma.

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  • Anonymous

    From 10 years weekly chart, SPX looks like have to come down to 300 DMA = 1250..

  • Anonymous

    The business sector generally presents a more upbeat picture. Capital spending on equipment and software has continued to expand, reflecting an improving sales outlook and the need to replace aging capital.

    http://www.marketwatch.com/story/text-of-bernankes-speech-on-economy-2011-06-07

  • Anonymous

    looks like spx ready to go…1500.

  • Jason

    A good time for discounted stocks. Spending will come back.