Time to Consider the Next Wrinkle
The last time we talked back in late March, we were considering how that
downturn would end. We had questioned whether the SPX would bottom around
1170 or 1150. At that time I said
I am reasonably sure that we are about to see the same sort of bottoming
process take place in the SPX contract in the current trade setting. Whether
that plays out at the current 1170 area or traces lower to use the 200 day
moving average around 1150 is really the question at hand, not whether we
are closer to an intermediate term trend change.
The market indeed bottomed although it went as low as 1138 or so and
overshot our 1150 target by another 1%. That was on the 20th of April,
almost a month after we last wrote.
Since then, the market became entangled in what I affectionately called
the rectangle strangle, three weeks of push and pull where the bears
attempted to break the market further and the bullish forces had decided
enough was enough. I wrote about this in the Daily Dose at TA Today around
the 24th of April suggesting that it was likely that this marked the end of
the decline from an short term perspective and I continued to position long
as a result. The chart below shows where the markets reside now. Last week
we got the break back up through the rectangle where what was resistance at
1162 has now become good support.
If you remember, the last time we spoke, I talked about when this time
came and what we would need to watch for. In particular I talked about
volume and said
When that bottoming price takes place and we get the turn, the next thing
you want to watch for is whether volume returns on the way back up or not.
and
If, once the trend changes, we don't see volume accelerate to above
average based on the 20 day smoothing factor, then we will most likely be
facing exactly the same situation as back in June of last year. The collapse
that followed was particularly ugly.
Well, so far, so good as the one thrust higher came on heavier than
normal volume while the two pullback days have come on lighter and lighter
volume. Too early to call it a victory as we need more up days to even begin
to discern the amount of buying interest. What is critical now is that the
support hold on these light pullbacks in order to get the next thrust
higher. On the SPX, key support comes in around 1158-1162 with less
significant support around 1170.
The measurement from the rectangle breakout suggests that this run should
carry us to at least 1190 SPX. In order to do that though, the BKX will have
to help. We had surmised the last time we spoke that a push to 93 was likely
in the cards due to the neckline break of the head and shoulders top. It
didn't quite get there but came close. Now it is stuck between the 200 and
50 day moving averages and the very short term direction of the SPX likely
depends on the behavior of this index. Key off of it for near term trading
direction. The 99 area has to break, most likely for the SPX to truly push
higher. We could meander higher but as long as 99 holds as resistance it's a
red flag. In fact we so much as stated that the last time we looked at this
charts saying ...
Regardless which way it plays out, that 99 area looks like a deadly area
for an advance when do move higher again. That's an area to take a good look
at when the advance comes on the SPX because it's likely the BKX will show
you when the broader SPX is ready to fall again.
On the NASDAQ, the story looks somewhat similar. I have considered the
best case, likely case and pullback case for that index they in the chart
below.
Where are the Oscillators?
As you know, I like to use the 10 and 30 day moving average oscillators
built of the advancing versus declining issues on the both the NYSE and the
NASDAQ. Take a look at a comparison of the following two charts. The first
shows the NASDAQ over the past year while the second shows the 30 MA Day AD
line for the NASDAQ. Look back at the very left of the charts. Declining
issues peaked at the May lows and the crossed back under the advancing
issues at the end of June which coincided with the top of the market at that
time. Take a look.
The period we see now looks very familiar to that period of time as the
moving averages in the general indexes were similarly positioned, there was
the need for an oversold bounce after the declines first in March and then
again in May. Note that the bounce took about six weeks to play out. In the
current advance we are in week two. Assuming an advance of similar length,
we should see this move higher last at least through the end of May till the
mid to latter part of June.
Conclusions and Strategy
Whether this break from the rectangle foretells of a move that's more
than an extended bounce play or the start of something larger is difficult
to tell. Clearly we have a short term uptrend in place against the backdrop
of a intermediate term downtrend. I'm inclined to believe the latter for
now. The strategy in the interim is to expect a short term uptrend to carry
for 3 weeks minimum to about 6 weeks maximum. We are just beginning week two
as of this writing. As long as the SPX holds above the 1158-1162 area near
term, we have to expect a continuation of the move. Next resistance lies at
the 50 day MA around 1180. This corresponds with 10400-10470 resistance on
the DJIA and 1990 resistance on the NASDAQ. It's likely that the first
pullback (backfilling) of significance carries from these areas. As long as
the SPX holds the higher low, then the next move higher can occur. That
thrust is likely to push us to the projection points of 1190 SPX,
10500-10600 DJIA, 2020 NASDAQ. The risk/reward at that juncture becomes more
worrisome.
The strategy is to hold long on the first pullback and treat it as only a
pullback using index/e-mini shorts to cushion the retrace. I would look to
add to long positions on the occurrence. As long as the key support areas
hold, then cover short positions and add longs for the second thrust higher.
Once the projected targets come into view though, we have to begin to
sell into strength and begin to add some individual short positions as well.
We have to respect the intermediate term trend and expect a resumption of
the downtrend.
What would change my opinion of the above is if large volume occurs on up
days reduced volume on down days. If there is something that suggests that
the buying is institutional and is likely to continue. Otherwise it is
likely just short covering more so than new buying.
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