Tuesday, December 2, 2008

Bull Factor: Reversal of Price Failures

In looking solely at the price action, there is one factor that I view bullish. This is the reversals of the price failures in the S&P500 and Dow Industrials. I define price failures as breaks below key support levels. What is a key support level? A key support level is a pivot point low occurring at a time when investor sentiment is bearish (i.e, bull signal). Over 40 years of back testing suggests that such breaks of these key levels can lead to accelerated price moves lower; reversals of these breakdowns typically lead to moves higher. See figure 1, a weekly chart of the S&P500; key support levels are noted by the red dots.

Figure 1. S&P500/ weekly

Look at point #6 and we note a break below one of these key support levels and the subsequent cascading fall in prices. The close below the key support level at point #7 led to a 15% drop in the S&P500. This key support level then becomes resistance. But hold on, last week’s rally re-captured this key level and this is bullish. This also occurred in the Dow Industrials, but it did not occur in the NASDAQ or Russell 2000.

But hold on again, Monday's slaughter job put prices back below the key support level on the SPY but not on the Dow. The key level for the (SPY) comes in at 86.78. A second consecutive weekly close over this level would be bullish. Failure to capture this level implies caution.

Figure 2. DIA/ weekly

Figure 2 is a weekly chart of the DIA. Support, which comes in at 82.64 is holding nicely. A weekly close below this level is ominous. Buying in this region makes sense as it appears to be a low risk entry.

Lastly, I should reiterate that the NASDAQ 100 and Russell 2000 did not capture their key levels, which continue to act as resistance. For the QQQQ's, resistance is at 29.72. For the IWM, resistance is at 47.58. These ETF's traded right to these levels last week but failed to breakthrough.

No comments: