Posts Tagged ‘SPY’
As I mentioned in my entry of June 8th the markets looked prime for a fall. After the Spanish bailout was announced there was a brief rally but the markets then headed lower. Today rumors that the world’s central banks are going to backstop Europe caused the major averages to complete the formation of a bullish inverse head and shoulders pattern on the major indices.
If we use the SPY as an example, the head is at 127.13 and the neckline is at 134.25. A breakthrough of the neckline yields a projected target price of 141.37 which is close to the market top reached on April 2nd. The technical indicators are bullish. The RSI is above 50 and rising, positive momentum is increasing and the stochastic is overbought. The stochastic will stay overbought in rising markets so this rally looks like it is just beginning.
The VIX on the other hand has formed a bearish head and shoulders pattern. The head is at 27.73 and the neckline is at 20.83. A penetration of the neckline yields 13.93, roughly the March 16th low. The RSI is below 50, the stochastic is weak and on a sell signal and the MACD is turning down with increasing negative momentum. There is support at it’s 50 day ma which is where it is resting now and uptrend support at 19. A nice breakdown below both levels would confirm the uptrend in the overall market.
The markets are obviously anticipating a huge coordinated worldwide central bank move regardless of what happens in Greece over the weekend. Even the central bank of Canada checked in on Friday. If things don’t work out as planned however the markets could take a nosedive. Therefore we are either looking at S&P 1400 or S&P 1200 in the near future.
Gold has been acting bullishly ever since it bottomed in May. GLD is at the crossroad of the downtrend from the March major top and the intermediate minor tops. There has been talk that collateral for bailout funds for European banks will at least be partially backed by gold. If true this is an admission by central bankers that gold is a valuable asset such as real estate and this action can only be bullish for gold. If GLD can break through the current down trend resistance it should make a run to at least 174.
Conclusion: Right now is a dangerous time for both bulls and bears. If the central banks come through with their plans to prop up the European banks with liquidity the bull market should resume. If they fail to act then my original projection of S&P 1200 looks like it will be in the cards.
I seriously doubt that central banks and the Fed will allow the world financial system to fall apart so consequently they will do whatever is necessary to prop it up. My impression is that the market wants to rally and the correction may be over. All we need is some good news out of Europe and another round of QE3 to get the markets moving in the right direction.
The short covering rally this week basically defined the upper levels of the downtrend channels that the major averages are locked into. Aside from a technical bounce off the SPY 200 day ma at 1278 that coincides with the bottom of the channel, there was the hope that either the Fed or the ECB would come to the rescue of the markets with more quantitative easing. Since neither event happened we are now back to the possibility of a financial meltdown in Europe, a severe slowdown in China and a recession in the U.S. Bear market rallies are based on the slope of hope whereas bull markets climb a wall of worry.
The S&P hit the upper descending trend line of it’s downtrend channel yesterday and then again today. This area coincides with the neckline of the head and shoulders top and is an area of both strong horizontal and downtrend resistance. The stochastic is almost in overbought territory and the RSI is right at the midline where it would be expected to turn down in a continued downtrend.
and DIA are exhibiting almost the exact same chart formations.
Another technical indicator that we should look at is the ATR or average true range, a measure of volatility. If we look at the weekly chart of the S&P 500 we can see that the ATR declines on uptrends and forms rounded bottoms at market tops. It then moves up significantly on market declines as happened in 2010 and 2011. Right now the ATR is forming a rounded bottom and starting to curve up.
This is even more pronounced on the daily chart as the ATR is still rising even though the market is rallying. While past performance is no guarantee of future performance, the implication of this chart is that the current rally is merely a counter trend bounce and the market has not seen the final panic dump that signifies a true bottom.
If the ATR starts to decline while the market continues to rise past the head & shoulders neckline and on strong volume then that would be confirmation of a bullish trend reversal. Right now that prospect does not appear to be in the cards.
The market also rallied between May 21 and May 29 but the ATR dipped slightly and then kept rising. The rally ultimately culminated in a sell off. We appear to be in the same situation but the potential decline from this point on could be much greater.
Technical indicators are for the most part bearish. While the S&P has moved back above it’s 200 day moving average, the 50 day ma is curving downward and would act as major resistance assuming the index can even get that far. The MACD is underwater and while it has given a buy signal positive momentum appears weak and volatility is increasing. Volume on down days is for the most part greater than volume on up days.
Conclusion: Fast, sharp rallies such as we have seen this week are typical of bear market rallies. While it is unclear if we are in a bear market we are at least in a sustained downtrend. China is going to announce economic numbers on Saturday and Spain is going to ask the eurozone for help over the weekend. The Spanish banks have been rallying this week as evidenced by the etf EWP. This implies that a bailout of their banks has in all likelihood already been priced into the market. China’s economic numbers are allegedly going to come in weak. Therefore we may very well be in a ‘sell on the news’ environment regardless of what that news is.
While the market has been trending up for the past week, the pattern that is forming on the major indices appears to be that of a bear flag. To be exact these look more like bear pennants as they are triangulated. Triangles sometimes can be reversal patterns however, so until there is a breakout in either direction caution is the word.
As can be seen by the monthly chart of the SPY, the market has been finding support and resistance at it’s 20 and 50 day EMA’s. Any rally on the S&P will probably not make it past 1341 as that is also the neckline of the head and shoulders pattern. If the market breaks down further, there is a good chance that it will not bottom until it hits it’s 200 day EMA at 1181. In the declines that occured in 2010 and 2011, the market actually dropped slightly below it’s 200 day EMA before recovering.
Gold miners as evidenced by GDX look like they have finally bottomed and there are indications that they have reversed trend and are now heading up. The downtrend from the March top has been solidly broken and buy volume has been extremely strong off the May bottom.
Gold itself does not look too good however. While the double bottom from the December low has been tested twice, GLD is now hitting short term downtrend resistance from it’s May top. If it can manage to get past that line there are 2 more downtrend resistance lines that it must also get through before real progress can be made in the index. If the double bottom does not hold, with the dollar rising and banks dumping hard assets to raise cash, gold can head a lot lower.
The Euro has just broken through the neckline of a head and shoulders pattern that has been forming since September, 2010. With the neckline at 126 and the head at 148 the projected price target is 1.04. With capital fleeing the Eurozone, it appears that the only thing that will at least temporarily reverse a Euro decline is a short covering rally.
Conclusion: With chunks of Europe in a recession and captial fleeing the Eurozone, there’s an excellent chance the U.S. stock market will be dragged down until there are some signs of stability coming out of Europe. Of course another dose of QE will give the markets a lift and take the funk out of gold. Since we are in an election year, in all probability we will see more QE if the market drops too low.
The stock market has been dropping in a slow, agonizing fashion for the last 2 weeks although today it picked up a little speed. The SPY stopped it’s slide today right at it’s 200 day EMA of 1307. If the market doesn’t find some support at this level, the next level of support is 1260 which would fulfill the head and shoulders break down.
With the Facebook IPO coming up tomorrow, if some real bad news doesn’t hit the wire we will probably get a bounce off current levels. With on-going problems in Europe still unresolved and the doo at JP Morgan still hitting the fan, any bounce should be sold into as it will in all likehood be a dead cat bounce.
Yesterday GLD came within .33 of the December, 2011 low of 148.27 and today it rallied off a double bottom. The question is whether this is the start of a new leg up or if GLD will continue it’s march downward. There’s a good chance GLD will make a run to the top of it’s downtrend channel which right now sits at 158. We won’t know what the prognosis will be until it gets there as the downtrend must be broken before we can assume another leg up has started.
Conclusion: The S&P 500 looks like it may have hit a temporary level of support. The initial target of this correction is 1260 so even if we get a bounce from here the market will probably be headed lower.
The VIX has formed an inverse head and shoulders pattern. The pattern does not come into play however unless the neckline is penetrated. If the neckline is penetrated the target of the VIX is 27-28. This would correspond to the S&P 500 dropping to about the 1250-1275 area. The question is does it look like the neckline is going to be penetrated.
We can see that the VIX hit resistance at it’s 200 day EMA of 21.64. This also corresponds to the neckline of the pattern. There are negative divergences forming which indicate that the VIX should drop. The VIX hit a higher high between April and May but the MACD and stochastics hit a lower high. The MACD momentum bars were much stronger in the initial run up that started in April but the bars in the current cycle are much weaker. The RSI is also decreasing.
This would indicate that the VIX is going to pull back. It could pull back to it’s uptrend line and then create another right shoulder or it could drop through the uptrend line and negate the pattern. In any event the market should move up from here. If the VIX were to negate the pattern the S&P 500 and other market indices would in all likelihood resume their uptrends.
The SPY daily chart confirms the VIX chart as there are positive divergences indicating the SPY should head higher. The SPY hit a lower low between April and May but the MACD negative momentum bars are weaker in the current cycle indicating that negative momentum is waning. The RSI is at the same level that it was in April when the market rallied and the stochastics are oversold.
The SPY weekly chart still looks bullish. The SPY has pulled back to it’s 20 day EMA where it has found support. This level orresponds to the 2011 market top which is also acting as support. The RSI and stochastics are still above 50. The MACD has given a sell signal but if the rally continues that should quickly reverse. As long as the RSI and stochastics turn around above 50 the rally should continue.
There are numerous wildcards in play that could influence the market direction.
1) Good or bad news out of Europe and China.
2) The announcement of QE3 by the Fed or ECB.
3) Natural or man made disasters.
Conclusion: The technical indicators are pointing to higher market prices at least in the near term. It remains to be seen if the market can break out of the trading range it is in namely S&P 1340-1400. A VIX surge past 21.64 however would be an indication to at least hedge any long positions or go outright short.
The U.S. stock market is ready to move considerably higher. The S&P 500 has closed above the neckline of an inverse head and shoulders pattern with a projected move to the 1360-1370 area. The S&P is exhibiting bullish characteristics as the RSI and MACD are both rising and above the 50 level. Neither one is in overbought territory.
The S&P has also broken to the upside of an equilateral triangle where it has re-tested the breakout and is now flagging.
The dollar has broken through to the upside of a rising wedge. This is a bit unusual as a rising wedge is normally a bearish pattern. Based upon other technical parameters I believe this is a false breakout as the dollar has formed a bearish MACD divergence with the MACD hitting a lower high while the index itself hit a higher high. The dollar looks like it is on the verge of a correction.
Silver has formed a bullish MACD divergence as it has hit a lower price while the MACD has made a higher low. The downtrend in the RSI has been broken and there are 2 unfilled gaps, one between 29 and 30 and the other between 36 and 38.
Silver is flagging just below the downtrend from the September high. A breakthrough of this downtrend should bring us to the next downtrend which roughly corresponds to the top of the second gap at 38.
Gold has also formed a bullish MACD divergence although not as pronounced as that of silver and the downtrend in the RSI has also been broken.
Gold has an unfilled gap between 163 and 166 which corresponds to the downtrend from the September top.
Conclusion: It looks like another phase of the bull cycle has started and a rally that should last at least a few months is underway. With European and emerging markets acting skittish and U.S. economic numbers improving the U.S. stock market is starting to look like a pretty good place to invest.
Low risk long trades in the S&P, gold and silver could be placed here. A stop on the S&P should be placed just below the neckline at 1265. If the S&P fails to move higher and instead breaks below 1265 short positions should be established as a reversal off this pattern would be extremely bearish. The overall technical picture however points to higher prices.
The stock market technicals are pointing to further upside in this current rally. Unfortunately the market is not trading strictly on technicals as sovereign debt problems in Europe are over hanging the market. Barring an immediate European collapse I believe the market can move higher from this point.
As can be seen in the above chart the VIX is breaking down from a diamond topping formation. If it can break below 30 it will in all likelihood head to at least 25 where it may form a double bottom.
The dollar is hitting stiff resistance at the top of it’s downtrend channel as evidenced by the chart of UUP. Any good news out of Europe and the Euro should rise while the dollar falls thereby pushing stocks higher.
In the recent sell off the S&P pulled back to the mid-point of a wide downtrend channel that it has been trading within for the past year. It looks like the S&P could make a run to the top of the channel which would bring it to about the 1260 area. It seems unlikely that this downtrend can be broken unless Europe comes up with a solid financial plan that kicks the can down the road for at least a year.
Conclusion: It looks like we may have a Santa Claus rally after all. Everyone thinks the current rally is just a dead cat bounce and it probably is but the market may go higher than is expected.
The SPY and EEM have just broken out indicating the worldwide stock markets are heading higher.
The SPY broke out of the downtrend channel that has been in effect since the middle of April. The breakout looks strong as both the downtrend and the 20 day EMA were penetrated with the MACD turning up at the 0 level and the RSI breaking through 50.
At the same time EEM gapped up strongly above it’s 50 day EMA. While the 20 day EMA is still below the 50 day EMA it is turning up. The MACD is also turning up and the RSI broke through 50.
Conclusion: As I mentioned in my post of May 27, the U.S. dollar is in the dumps. Congress has also failed to raise the debt ceiling putting even more pressure on the dollar. It therefore appears that the carry trade is back on: sell the dollar and buy everything else. The S&P 500 looks like it’s heading to the 1425 area with EEM heading towards a triple top at 50. Commodities and high yield bond funds should also continue to move higher.
Obviously there is a huge gap between Wall St. and Main St. The U.S. housing market is in a double dip although it never really had a recovery. Unemployment remains high at the same time corporations are turning in record profits. While it is unclear what Bernanke is planning to do, Congress is playing a dangerous game by using the debt ceiling as a poker chip. Barring an actual debt default by the U.S. government, the key to bull market longevity is corporate profits. As long as they continue to rise the stock market will follow.
While technical analysis and chart patterns can give one an edge in the stock market, they are not perfect. Both Barrick and Randgold were looking extremely bullish on the charts and then both stocks broke down. That is why it is critical to set your stop loss at the time of the purchase.
Randgold broke down from a flag pattern and it’s chart now looks bearish as there is a head and shoulders pattern forming on it. GOLD appears to be heading towards the neckline at 70. A break below the neckline has a target of 35 but a reversal back up from it would be bullish. A trade either way is developing but I would wait for the stock to show it’s hand before jumping in.
Barrick broke down from it’s long term uptrend line and it’s chart now also looks bearish. It looks like it could be heading towards it’s 200 day EMA at 39.21.
The breakdown of gold miners indicates that the market believes the rising price of oil is a greater negative to gold miner’s profits than the increasing price of gold is a positive.
I have dissected the above chart of the SPY into various channels. Since the March 2009 bottom, the S&P has been rising in an ascending wedge pattern denoted by lines A and C. Right now the index is getting squeezed near the apex. While this pattern is normally bearish, a breakdown near the apex implies a small move. Therefore I would not put too much credence into this pattern.
Lines A & B form a parallel uptrend channel that the S&P has traded within since November 2008 except for 2 months between February and April 2009 when it dropped to the lower channel denoted by lines B & D.
The MACD at the bottom of the chart has been in an uptrend since November 2008 and it is now touching the uptrend line. The MACD is well above 0 and in order for it to continue rising along the uptrend line the market would need a strong surge.
The RSI at the top of the chart is at levels where it moved higher along with the market since November 2010.
The S&P has been rallying along it’s 10 day EMA since September 2010 and is sitting right at it now. It has also flagged down to it.
All the moving averages are in positive territory as the 10 day is above the 20 day, the 20 is above the 50 and the 50 is above the 200.
Conclusion: Overall the chart of the S&P looks bullish but there are 2 problematic features to it: 1) The MACD is touching it’s long term uptrend line at a high level. It would take great market strength for it to push higher from this point. 2) The S&P is coasting along the top of it’s uptrend channel. While it could ride the upper trend line, at some point it would either have to break through to the next trend channel or head lower.
If the MACD breaks below it’s uptrend line then it would probably head to the 0 point. The last time it did that was in July-August 2010 when the S&P hit the bottom of the uptrend channel twice during that period. The bottom of the uptrend channel currently sits at about 1175 so a similar move in the MACD would in all likelihood take us down to that level.
The 1200-1250 area is a strong area of support. The next major level of support is at 1150 which is below the lower uptrend line. A strong break below line B would indicate that we are heading into a bear market phase with a target of line D that is about 975.
Bear markets generally happen when everything is rosey and then some thorns appear. That is not the case today as there are more thorns than roses, so I do not believe we are heading into a bear market. We may however be setting up for a steeper correction. A correction could also consist of sideways trading where the market is range bound for a few months before it heads higher.
There is some uncertainty in the market as QE2 is ending in June. Based upon current economic data, my impression is that the U.S. economy is still not self-sustainable. This leads me to believe that Ben Bernanke will institute some form of QE3 in order to prop things up.
The U.S. stock market has been grinding away in a tight trading range since the beginning of the year and this chart pattern looks like a bull flag to me. The market has also been working off it’s overbought condition during this time period and it is no longer overbought. Financials appear to be consolidating after a nice run in December and Energy is resuming it’s uptrend.
It’s unclear if GLD has triple topped and is still correcting or if it is in the process of working it’s way to a breakout of an ascending triangle. Technically GLD looks like it is breaking down as the MACD and RSI have been falling while the price hit a new high and then triple topped. I suspect that if the bottom falls out it will happen quickly. I would hold off on adding to any long gold positions until it is known for sure which way it is headed in the short term. An aggressive trader should play the short side of gold based on these technical indications.
China and the FXI are getting squeezed in an equilateral triangle but it will break out either way shortly.
The uptrend in the emerging markets ETF EEM is still intact but there is a rather large head and shoulders pattern rising along this line with the left shoulder encompassing another head and shoulders pattern. The chart looks bearish as the MACD looks like it is about to turn down and head below 0. A break below the uptrend line could signal trouble for this ETF.
The U.S. stock market has been rising of it’s own accord as economic conditions in this country are improving and this improvement is expected to accelerate this year. It also appears that money is coming out of foreign markets and being put to work in the U.S. stock market. China announced that they would buy the debt of some of the PIIG countries so that should provide some stability to the European debt problem.
The bears keep harping on the bad housing market but that is old news and will not keep the stock market from rising. While Ben Bernanke has publicly announced that the Fed will not bail out financially strapped municipalities, that does not preclude the U.S. government from doing so. It seems unlikely that the legislative and executive branches of the government will not come to the aid of municipal governments especially after having bailed out public companies.
Conclusion: The U.S. stock market is heading higher in 2011, possibly a lot higher.