Saturday, October 31, 2009

Stock Market Update 31 Oct 2009

A very interesting week in the markets the past week. We are at a very important crossroads and next week should give us guidance as to whether we continue up from here or we collapse into the next phase of this bear market.

Click on all charts to enlarge.

SPX 6 month daily:

My daily trading chart gave a short term sell signal on Tuesday as per the annotations on the chart. As of Friday's close, we are still bearish in the short term.

Of note is price has now broken below the 50 day moving average and looks set to challenge the previous support level of 1019.95. This price action is very similar to last significant correction back in the June/July period (more on that with the next chart).

SPX 1 year daily:

During June/July price had set up what looked like a bearish ascending wedge. A breakdown occurred in mid-June and price fell to test the previous support level at 878.94. Note that price violated that support level on an inter-day basis but was not able to achieve a daily close below that level. When this failed to materialize prices again started their advance.

We are in a similar position today. Price has broken below what appears to be another bearish ascending wedge. However, as of Friday's close price has not violated the previous low at 1019.95. Until it does so, it is too early to say that the bull run off the March, 2009 bottom is completed.

Should price close on a daily closing basis below this level (1019.95), it must be assumed we have potentially switched into the next down phase of this long term bear market. Should that occur I would immediately close out my 50% long equity position in the Provident Fund.

SPX PNF traditional:

The Point and Figure chart confirms my analysis previous. The last signal was a bullish buy signal on a price close above 935 and a projected target of 1295. It would take a closing price at or below 1010 to switch this chart to bearish.

SPX 2 year weekly:

A reminder once again of the current forces acting on price:

-the bottom trend line and the 13 week EMA pushing prices up,
-the 50% Fibonacci retracement level at 1121 holding prices down,
-the fairly strong volumetric resistance line at 1120 holding prices down, and
-the trend line from the market top in Oct, 2007 holding prices down (currently sitting at 1125).

All this leasds us to the inflection point we are currently at. I feel a resolution in either direction will be swift and violent so we need to be very vigilant here.

SPX weekly vs 89 wSMA:

A troubling signal is price closing this week below the 89 week Simple Moving Average (currently at 1060.37). A previous close above was one of the confiming signals I used to shift funds into equities due to it's very accurate long term track record.

This level is critical if this market is to continue to rise and must be watched closely.

SPX monthly vs 20 mEMA:

Lending credence to a possible downward thrust is the refusal of price to close above the 20 week Exponential Moving Average on a monthly closing basis. We were over it mid-month but by the last trading day in Oct (Friday's close), price was unable to close above the 20 mEMA.

Bottom Line:

I said this in my previous blog post:

I will continue to monitor the markets over the next few weeks but will not be
comfortable "all is well" until we can get above the 61.8% Fibonacci level of
the decline (approximately 1230). Until that level is surpassed, I am of the
opinion that this is still a rally into a long term bear market. As such, I
still think that we will see lower prices (below the March/2009 bottom) some
time in the future. My work with cycles indicates we will not be in a
"comfortable" position until at least 2015.

My opinion has not changed. This market is dangerous and over-valued. There are 100's of "fundamental" reasons why we should not be any where near this price level. However, for whatever reason we are where we are.

The thing about Technical Analysis that is so amazing is what the charts reveal is the collective thought process of millions of investors who are "expressing their opinion" with the only thing that really counts; MONEY. No matter what "X" or "Y" advisor or analyst thinks about the markets, the only thing that really matters is price.

As of today, the technicals are telling us the "collective" believes prices have gotten a bit too high in the short term. Is it possible that this could turn into the next severe bear market leg down? Absolutely. However, technically that information has not been presented "yet?".

Should price close below approx 1019 on the SPX, that would violate the previous support level and be a technical trend change to the downside. As I discussed previous using 5 x the ATR, my calculated stop was 1027.72. I am prepared to allow a slight amount of "leash" to the 1019 level to give the market a chance to prove itself. However, should price close on a daily closing basis below 1019 I think there is a very real chance we will have begun Wave "C" down in this bear market.

I will blog another post on the longer term cycles and potential (I don't want to scare the hell out of everyone just yet!) but it is important to know where my "line in the sand" is with these markets.

As of today my strategic position remains unchanged at a 50% Equity/50% USD cash position.**

**Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).

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