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Disclaimer

QUOTE CHART OPINION

Time to Consider the Next Wrinkle

The last time we talked back in late March, we were considering how that downturn would end. We had questioned whether the SPX would bottom around 1170 or 1150. At that time I said

I am reasonably sure that we are about to see the same sort of bottoming process take place in the SPX contract in the current trade setting. Whether that plays out at the current 1170 area or traces lower to use the 200 day moving average around 1150 is really the question at hand, not whether we are closer to an intermediate term trend change.

The market indeed bottomed although it went as low as 1138 or so and overshot our 1150 target by another 1%. That was on the 20th of April, almost a month after we last wrote.

Since then, the market became entangled in what I affectionately called the rectangle strangle, three weeks of push and pull where the bears attempted to break the market further and the bullish forces had decided enough was enough. I wrote about this in the Daily Dose at TA Today around the 24th of April suggesting that it was likely that this marked the end of the decline from an short term perspective and I continued to position long as a result. The chart below shows where the markets reside now. Last week we got the break back up through the rectangle where what was resistance at 1162 has now become good support.

If you remember, the last time we spoke, I talked about when this time came and what we would need to watch for. In particular I talked about volume and said

When that bottoming price takes place and we get the turn, the next thing you want to watch for is whether volume returns on the way back up or not. and

If, once the trend changes, we don't see volume accelerate to above average based on the 20 day smoothing factor, then we will most likely be facing exactly the same situation as back in June of last year. The collapse that followed was particularly ugly.

Well, so far, so good as the one thrust higher came on heavier than normal volume while the two pullback days have come on lighter and lighter volume. Too early to call it a victory as we need more up days to even begin to discern the amount of buying interest. What is critical now is that the support hold on these light pullbacks in order to get the next thrust higher. On the SPX, key support comes in around 1158-1162 with less significant support around 1170.

The measurement from the rectangle breakout suggests that this run should carry us to at least 1190 SPX. In order to do that though, the BKX will have to help. We had surmised the last time we spoke that a push to 93 was likely in the cards due to the neckline break of the head and shoulders top. It didn't quite get there but came close. Now it is stuck between the 200 and 50 day moving averages and the very short term direction of the SPX likely depends on the behavior of this index. Key off of it for near term trading direction. The 99 area has to break, most likely for the SPX to truly push higher. We could meander higher but as long as 99 holds as resistance it's a red flag. In fact we so much as stated that the last time we looked at this charts saying ...

Regardless which way it plays out, that 99 area looks like a deadly area for an advance when do move higher again. That's an area to take a good look at when the advance comes on the SPX because it's likely the BKX will show you when the broader SPX is ready to fall again.

On the NASDAQ, the story looks somewhat similar. I have considered the best case, likely case and pullback case for that index they in the chart below.

Where are the Oscillators?

As you know, I like to use the 10 and 30 day moving average oscillators built of the advancing versus declining issues on the both the NYSE and the NASDAQ. Take a look at a comparison of the following two charts. The first shows the NASDAQ over the past year while the second shows the 30 MA Day AD line for the NASDAQ. Look back at the very left of the charts. Declining issues peaked at the May lows and the crossed back under the advancing issues at the end of June which coincided with the top of the market at that time. Take a look.

The period we see now looks very familiar to that period of time as the moving averages in the general indexes were similarly positioned, there was the need for an oversold bounce after the declines first in March and then again in May. Note that the bounce took about six weeks to play out. In the current advance we are in week two. Assuming an advance of similar length, we should see this move higher last at least through the end of May till the mid to latter part of June.

Conclusions and Strategy

Whether this break from the rectangle foretells of a move that's more than an extended bounce play or the start of something larger is difficult to tell. Clearly we have a short term uptrend in place against the backdrop of a intermediate term downtrend. I'm inclined to believe the latter for now. The strategy in the interim is to expect a short term uptrend to carry for 3 weeks minimum to about 6 weeks maximum. We are just beginning week two as of this writing. As long as the SPX holds above the 1158-1162 area near term, we have to expect a continuation of the move. Next resistance lies at the 50 day MA around 1180. This corresponds with 10400-10470 resistance on the DJIA and 1990 resistance on the NASDAQ. It's likely that the first pullback (backfilling) of significance carries from these areas. As long as the SPX holds the higher low, then the next move higher can occur. That thrust is likely to push us to the projection points of 1190 SPX, 10500-10600 DJIA, 2020 NASDAQ. The risk/reward at that juncture becomes more worrisome.

The strategy is to hold long on the first pullback and treat it as only a pullback using index/e-mini shorts to cushion the retrace. I would look to add to long positions on the occurrence. As long as the key support areas hold, then cover short positions and add longs for the second thrust higher.

Once the projected targets come into view though, we have to begin to sell into strength and begin to add some individual short positions as well. We have to respect the intermediate term trend and expect a resumption of the downtrend.

What would change my opinion of the above is if large volume occurs on up days reduced volume on down days. If there is something that suggests that the buying is institutional and is likely to continue. Otherwise it is likely just short covering more so than new buying.

 

 

L.A. Little is the author of TA Today (www.tatoday.com). He champions the idea that the trading fields are far fairer now than they have ever been for the small trader and that the tools, cost structure, and access to the markets requires one to actively manage their securities and thus their financial destiny. As an outsider to Wall Street, but with an interest in trading that spans two decades, you get a different view on what today's trading landscape consists of and how you can profit by it. He is the author and presenter of numerous technical articles both domestically and internationally, primarily in the field of Telecommunications Quality Assurance.

TA Today (www.tatoday.com) is a practical online trading service. It is premised upon the idea that trading based upon technical analysis and probability measures can become a profitable pastime or profession for most anyone. The site features daily commentary and potential trading ideas coupled with a public trading diary. Additionally, a weekly Heads Up column attempts to game the market's tendencies for the coming week. Finally, there is a weekly email subscription service, Naked Trades, that exposes potential trades in the context of an educational journey.


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