SPY surges then falters at 109.37 – was that it? Maybe…

SPY surges then falters – was that it?  Maybe…

After popping 5% since my last post, the market rally fizzled but is still up 2 points from where it was.  The market looks very weak here and could not even rally up to a downtrend line drawn from the April highs.  Not good. 

Holiday trading usually distorts things; will see what news the weekend brings but the technicals say the bear market is resuming. 

S&P 500 20 Year History - Breakout in 2015?

20 Year history of the S&P 500:

Despite all the choppiness, clear periods of up trends and down trends are evident. 

In the past 2 major secular bear markets (1930s and 1970s) the market took 15 years to exceed its prior highs.  Assuming 2000 marked the high tide mark of this secular bear, it would not be outrageous to assume we are in for another 5 years of up and down choppiness before a decisive breakout to higher ground.  Of course, in there, there will be plenty of tradable rallies and declines.

A Short, Sharp Rally From Here (SPY @ 107.82) is Likely

A Short, Sharp Rally From Here is Likely

Wednesday, May 26, 2010 (SPY @ 107.82 before the market open):

Several bullish factors are in place:

1.) Key reversal – market gapped open sharply lower, then rallied back to close higher.

2.) Failed downside breakout – market violated most recent spike low only to rally higher, confirming at least short-term support there. 

3.) Higher volume on last 2 up days than on 4 of the 5 last down days – a bullish sign of accumulation.

4.) Near-term support also from the 104 February low. 

5.) Market oversold – 14% sharp decline on heavy, panic volume with many down gap days since April 122 peak. 

6.) 2b bottom in place according to Vic Sperandeo's criteria (fudging a little on the trendline violation).

7.) Long upside day on heavy volume with close near the top and open near the low. 

8.) News from Europe and the Gulf and Korea is unremittingly bearish (which, in the contrarian world of trading is bullish).

Is this is a significant market bottom?  Unlikely, but again, we don't have to guess.  If you are short or flat, consider dipping a toe back in, buying a little at 108 stop and a little more at 110 stop, the bottom of the last down gap.  Place sell stops immediately at the market low of 104.38 (I usually go a bit lower, perhaps to 104.35 or 104.3).   If you are filled near 108, you will have fewer than 4 points of risk.   If the market does rally, watch how it behaves around 112 (the 200 day average), 116 (the bottom of the most recent flag) and 118 (if it clears the 50 day and the most recent relative high). 

Remember that markets exist to frustrate and disappoint most people, so stay very flexible here, but it is worth a shot.  Covering shorts is probably not a bad idea until things settle down.

What is true of the broader market is even more true of certain sectors, such as Basic Materials:

Shorting China remains a very profitable trade, but expect a pull-back (possible Chinese rally):

The financials still look weak and the fundamentals are atrocious (weak balance sheets, pending regulation, probable paradigm shift as they go from being gambling houses to boring old utility-like banks):

A weekly chart shows that despite the pullback, financials still have quite a ways to tumble:

The dollar looks over extended and ripe for a pullback:

The Swiss franc continues to get crushed with little technical evidence of any end in sight, although the currency is probably short-term oversold. Notice the extremely high volume up day three days ago:

The Swiss stock market is also relentlessly selling off:

Hong Kong looks very interesting with extremely strong support at these levels after panic selling:

Buy Signal Valid - Market Sells Off on Heavy Volume

Thursday, May 06, 2010 (SPY @ 112.94 down 3.32%).

The dollar is going parabolic after a decisive breakout 3 trading sessions ago on massive volume.

The Euro is selling off with 4 gap down days in a row on very, very heavy volume.

Despite the dollar rally, gold, which usually moves inversely to the dollar, is rallying.  Some caveats:  we have been here before, some of this is reflexive buying in panic over the Greek-Euro situation, and there is heavy resistance at around 120, where GLD was turned back in December on very heavy volume (much heavier than the underwhelming up volume seen recently). 

Someone is selling Switzerland…

Beautiful double top in place for Homebuilders.

Financials have been breaking down all April, making lower highs with extreme distribution (much greater volume on down days than up days).   Is it too late to short these stocks?

The weekly chart says no:

Despite all the drama of a 1,000 point Dow plunge, this only brings the market (and the financials) to about where they were at the start of the year.  If the financials tested their March 09 lows, that would represent over a 50% additional decline from here. 

What's the easiest way to short the financials, even in a retirement account?  Consider the UltraShort Financials ETF:

Expect lots of choppy trading days ahead up and down, but the odds favor continuation of the selling seen today, perhaps in an even more dramatic fashion.  Traders and investors are still reeling from the psychological damage caused by the market's decline in 2009 and have all convinced each other that that is in the rear view mirror.  Perhaps not.  Another leg down could be much more precipitous as people rush for the exits.  They have seen this episode before, and it does not look like any central bank is able to bail out the world.

One conciliatory observation:  an intraday S&P 500 chart shows that the massive sell-off occurred in a space of about 10"; 20" after it had begun, the market was clawing its way back to where the sell-off started, then even rallied past the sell-off point, only to see-saw within a much narrower range for the rest of the session:

Still, the fact that the market could sell off so sharply for whatever reason in whatever time frame is unnerving and no doubt will have people eyeing their portfolios very warily going forward. 

S&P 500 issues sell signal at 117.60

SPY @ 117.60 violates 20-day low.

May 5, 2010 (before the market open in New York):   The S&P 500 has now confirmed a new downtrend, violating the 20-day low.  (I cheated a little and exited a few days ago at higher prices because the market had violated an up-trend line and was showing clear signs of distribution (far more volume on down days than up days)).

















Several things about this violation confirm a more bearish stance:
  - the 20-day low was violated with a close below the low - this alone should be enough, but...
  - it was a "long bar down day" with a decline of 2.35%;
  - it violated a pennant consolidation area forming on the wrong side of an uptrend line;
  - it occurred on very heavy volume;
  - distribution continues - 4 of the 5 heaviest volume days of the past few months have been down days and most up days have been on below average volume;
  - the failure to follow through on the 122.12 new relative high of 2 weeks ago is now confirmed (a failed signal is one of the most reliable signals).

Fundamentally, the backdrop remains difficult with financials clearly in the cross hairs of now awakened regulators.   Whatever the outcome of the GS criminal and civil probes, there is a chance that banks will go back to being banks, meaning a rather ho-hum, non-sexy business somewhat like utilities.  As the financial sector contracts to reflect these more realistic growth prospects (not to mention the enormous balance sheet damage that still must be worked off) you will see the S&P 500 dragged down.  Interestingly, though, this decline is not being led by financials (XLF), who actually had a better day yesterday than the broader market although still down sharply.   The big damage seems to be in Basic Materials (XLB) down 3.47% (Ultrashort Basic Materials SMN is a good way to play that move, up 7.72% yesterday.
The oil spill in the Gulf of Mexico means at a minimum off shore drilling is on hold and expect a flurry of new regulations and perhaps some closed or idled rigs.  All of this can be bullish for black gold but this could put a drag on the United States economy, just as the collapse of the price of oil gave an unexpected windfall over the past few years.
China, which has really become a leveraged bet on the American consumer, continues to sell off very sharply. ProShares Ultrashort FTSE, FXP, mentioned here last week, continue to surge, rising 7.5% yesterday alone and are currently 22% above their recent low a few weeks back.
Many interesting plays out there.  Fasten your seat belts!