Wednesday, June 30, 2010

What's Next? The Obvious Take

The "fat pitch" that was looking good has fizzled into a stinky, foul ball. In all likelihood, we are looking at a bear market.

Tuesday's horrendous and high volume price action has led to a break below our key pivot points. A weekly close below these support levels represents a failed signal. Failed signals generally are a hallmark of a bear market. Thusly, there is significant downside risk.

So what is next? The most likely outcome is a bear market. Our support levels on the SPY (107.58) and on the QQQQ (45.01) are now resistance. For the intermediate term investor - not traders looking for a 3 day bounce -there are two instances in which I would go long this market:

1) if prices on the major indices close above resistance (old support) levels

2) investor sentiment becomes extremely bearish (i.e., bull signal), and within this context of another "fat pitch", I would consider the long side provided I had the necessary risk controls in place.

Over the short run, the market is oversold, and as we come into the quarter end and July 4th holiday, I would expect a bounce. Unless prices close above the mentioned resistance levels, I would look to unload any market correlated long positions into this lift.

In the next article, I will provide an alternative take on the technical dynamics in the market.

I have posted charts of the SPY and QQQQ below showing key pivot points (i.e., red dots) which are areas of support and resistance.

Figure 1. SPY/ weekly

Figure 2. QQQQ/ weekly


Onlooker said...

The market is showing a bearish character where sideways is bearish leads to further downside and bounces are only enough to reset short term sentiment and other internals.

We've seen a lot of evidence that the market's character has changed, at least for the intermediate term. Recognizing that and making the shift in tactics is a key to handling these transitions, it seems to me.

I still remember the talk of the market being oversold, etc., coming off the Mar '09 bottom. And that lasted pretty much all the way through for the bears who couldn't shake their bias; and paid dearly for it.

Maybe we end up falling off the cliff on the open tomorrow, busting through that 1040 level finally and getting a big woosh lower to really get a tradeable bottom of sorts.

Guy M. Lerner said...


You just have to respect the changes and price dynamics occurring; it is the "correct" thing to do from a risk perspective

These are the same patterns I have calling out on the dollar, bond, natural gas, etc...I am not sure why this time should be different

ryanmburke19 said...

As an intermediate-term trader, I am bothered by the fact that weekly charts have a long way to go before they get max oversold. (If we are in a bear market, then this is usually what it takes to bring in buyers; if not, then they should seemingly be stepping in soon). Moreover, despite apparently historic daily oversold readings in early June, the SPX couldn't mount anything better than quickly reversed rally.

When I look at the SPX chart pattern, I am actually reminded a bit of 98. Obviously, there were macro crosswinds then as well. In 98 as well as in 37-38, the DJIA penetrated all the way back to its base before stabilizing. That implies 900-950. I will be watching this area, weekly oversold readings, as well as underlying sentiment to decide whether to become something more than a bystander.


Guy M. Lerner said...


Difficult to know exactly what will happen, but whatever does happen throwing caution to wind or ignoring those risks is not appropriate at this point --even if the market reverses and goes higher starting tomorrow the "correct" play -if there is such a thing - is to note that this is a failed signal and these kind of signals can lead to accelerated losses; getting out of the way now is like buying insurance