Tuesday, December 16, 2008

Key Price Levels

Key price levels are points where buying and selling are most likely to take place. With over 40 years of backtested data, I have defined these key price levels as a pivot point low occurring at a time when investor sentiment is bearish (i.e, bull signal). These key areas are shown with the red dots in figure 1, a weekly chart of the ETF proxy for the S&P500, the S&P Deposit Receipts (symbol: SPY).

Figure 1. SPY/ weekly

Now let's stay with figure 1, and focus on the price bars with the red labeling. These are positive divergence bars between a momentum oscillator and price. Positive divergence bars tend to occur at market bottoms and are of indicative of decreasing downside price momentum. They don't always lead to trend reversals, and more likely the highs and lows of the divergence bar will define a price range. A weekly close above the highs of the positive divergence bar will lead to higher prices (and is considered a breakout) and a weekly close below the lows of the positive divergence bar will lead to lower prices (and is considered a breakdown). The highs of the current positive divergence bar are at 90.13.

My interpretation of the SPY chart is as follows: the price action has been good with two consecutive weekly closes over 86.78. Currently, prices are trading to resistance levels as defined by the highs of the positive divergence bar. A weekly close below 81.78 would be serious technical damage. A weekly close below 86.78 implies weakness and increasing caution. A weekly close over the highs of the positive divergence bar at 90.13 would be bullish.

Figure 2 is a weekly chart of the Dow Jones Industrials ETF proxy, the Diamond Trusts (symbol: DIA). The key levels and positive divergence bars are noted. Prices have yet to close above near term resistance at 88.36.

Figure 2. DIA/ weekly

Figure 3 is a weekly chart of the Power Shares QQQQ Trust (symbol: QQQQ); prices are currently probing the upper reaches of the resistance zone as determined by the key support level at 29.72 and the highs of the positive divergence bar at 29.35. A weekly close over both of these levels would be very bullish and likely catapult the markets into a mutli week rally. For now and until further notice, the current price action in the QQQQ is suggestive of a bear market rally into resistance.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). Resistance levels are noted and like the QQQQ, this is nothing more than a bear market rally unless these levels are taken out on a weekly closing basis.

Figure 4. IWM/ weekly

The major indices and their ETF proxies are providing a mixed picture. The SPY and DIA appear to be further along in the bottoming process as key resistance levels have been taken out already. The QQQQ and IWM have traded back to prior areas where selling commenced and old breakdown areas (or resistance levels) have not been convincingly taken out.

Market sentiment is also mixed, and market internals remain lackluster despite a 10% move in the S&P500 over the last 3 weeks ( on a weekly closing basis). Until resistance levels are taken out in all the major indices, I will not be convinced that the recent rally is nothing more than a bear market rally.

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