Tuesday, June 8, 2010

Some Technical Signposts To Help Navigate An Increasingly Hostile Market (part 1)

In this article, I will take a look at some of the key price levels on the major indices to help determine our future course of action.

As we all know and would expect, investor sentiment has turned bearish over the past month. In my world, this is a bullish signal. As I have painstakingly pointed out over the past couple of weeks, the presence of bearish sentiment is not a reason for the market to go magically higher, but it is in this type of environment that we get the accelerated price moves if the market does reverse higher. Thus, reward and risk is skewed in my favor (most of the time) and by adhering to my buy and sell points, I can navigate a relatively hostile environment more comfortably as I have a plan.

This is what the technicals are for. The technicals will get you in to participate in the market (if there is upside) and they will get you out if the market continues lower. I will let someone else determine why the market does what it wants to do.

Once again, I view this environment as a "fat pitch" and currently we are in the "sweet spot" when a market turn should develop. This does not mean that it will come at these levels, but now would be the most likely time. I am willing to stress my thesis that a turn in the market is at hand. I will let someone else determine why the market does what it wants to do.

The first figure I want to show is a weekly chart of the Ultra Short S&P500 ProShares (symbol: SDS); see figure 1. SDS is a 2x leverage product that inversely tracks the S&P500, yet is long only. Looking at figure 1, we note the key pivots. As you know, key pivots are those areas where buying (support) and selling (resistance) are most likely to take place. The key pivot point at 33.58 is identified, and this is the 4th week in a row that prices are above this level. This has to be considered bullish for SDS, which is bearish for the S&P500.

Figure 1. SDS/ weekly

Yet, why didn't I make the call of a bear market, which this technical set up implies, 4 weeks ago? I did not have confirmation from the S&P Depository Receipts (symbol: SPY). See figure 2 a weekly chart. The key pivot for the SPY comes in at 106.70, and price has yet to close below these levels on a weekly basis. It should be noted that back in July, 2007 SDS closed above a key pivot point while the SPY continued in a range. It wasn't until January, 2008 did SPY break down (i.e., close below a key pivot point) thus confirming the bear market.

Figure 2. SPY/ weekly

So what information can we draw from these two charts? SDS is bullish and SPY is "almost" bearish. A weekly close below SPY 106.70 is reason for caution, and this level now becomes resistance. A weekly close back above this level is reason enough to go long. Those are the signposts as I see them on the S&P500. This week - which is the sweet spot - will be telling.

Figure 3 is the PowerShares QQQ Trust Series (symbol: QQQQ). Key pivots are identified. The next key pivot is at 42.33. Prices are below the 40 week moving average for the first time in over a year.

Figure 3. QQQQ/ weekly

The flip side to the QQQQ is the UltraShort QQQ ProShares (symbol: QID). This is a 2x leveraged product that moves inversely to the Nasdaq 100. This chart is bullish as prices are definitively above the key pivot at 18.49.

Figure 4. QID/ weekly

So another set of bullish and bearish charts that has me cautious (i.e., paying attention to risk) despite my belief that we are in an environment that could see accelerated gains.

To summarize, the S&P500 is on the cusp of a failed signal, which has the potential to lead to further losses and an extended downtrend. The Nasday 100 remains above support levels.

In part 2, I will break out the daily charts and try to pin point some key pivot points that may get you into the market sooner with less risk.


honduvision said...

Could you do the same for the Russel and TZA? I would love to see a similar comparison.

Guy M. Lerner said...

will do Russell on wed