S&P 500 - July 20, 2009

charts courtesy of stockcharts.com

The rally continued.

On July 7, which now seems like an eternity ago, I said

Index is at very strong multi-month level around 875-885. A short while ago, many were dreaming of a pullback to this level to load up for the next round of green shoot rally. Well, now they have their wish. Let’s see if they put money to their dreams or not.

Bulls surely went for the pullback-to-support and bought everything they could find.

As we expected, S&P joined the Tech indexes and confirmed a new mid-term uptrend (no surprises there). This was a hell of chop month. We had two mid-term trend reversals. Right now, statistics and probabilities point to a continuation of the uptrend over an intermediate time frame

On the daily frame, index is getting overbought. On shorter time frames, index is extremely overbought, and there are divergences everywhere.

Notice that for the entire run from 935, MACD declined. Also notice that, although RSI diverged negatively from price, it did not dip in any meaningful way. Such is the power of the underlying bid (wherever that might come from). And there it is: the proof to my claim that price is the most important indicator available to a technician -- and the simplest

Let’s zoom in a little

Seems like the 5th wave of the ongoing rally extended itself into a diagonal. I still would like to point out to you the support shelf on RSI and the uptrend of MACD. They have been supportive of the short term move so far. Their break may indicate a pullback is underway.

I don’t think it is time for me to buy right now. I think it is time to look at whatever I have and see what I would like to secure and how, and, then, wait for a pullback.

If the count is correct, and if the underlying strength persists, a theoretical target may be the area of a prior wave 4 of a lesser degree, which gives us 925-935. Or I can use Fib levels or support resistance lines. There are multiple levels of support. If the index is truly strong, those levels should give the bears a hard time.

If a pullback materializes, I shall be patient for it to run its course and use momentum indicators to time an entry.

I have been aligning myself with the expected (and now confirmed) mid-term uptrend, especially with Nas100. Since we are in an uptrend, I will try to use oversold levels to see if a long position is warranted.

I also have to mention that there is no guarantee the trend will not reverse within a few days. It is unlikely, but since non-governmental macro level econo-data is not supportive of what the market is pricing at this point, I will take every measure I can to protect myself against sudden shocks and collapses.

I, unfortunately, have no crystal ball, and all I can do is trade the chart in front of me, which, at this time, looks promising.

For the day, volume was below average. Breadth was very good

A/D line is at new peaks. So is the number of new highs.

McClellan Oscillator (MO) is back in overbought areas. That is good, and confirms the internal strength of the recent move. We identified a move by MO on July 14 as noted on the chart above

Looking at this favourite chart of mine

I see a vastly improved picture.

So, knowing that there are no guarantees in the market, and reminding you, and myself, that I have no knowledge of the future, I stay with my charts. I have no plans to buy anything right now (other than intraday trades). I have hedged whatever I wanted to hedge. I have some put spreads targeting 930, but other than that, I have no plans to short in any meaningful way (other than intraday trades). I have plans to add to longs after a pullback. My plans will stay on as long as market agrees with them.

I shall remember that same way market whipsawed the bears into slaughter at the bottom of the 875-955 range, it can roast the bulls around the top of the range. My strategy is hedge-and-increase. If I cannot do it the way I want it, I will not add to existing positions.

Let’s Wrap Up:

S&P is in a mid-term uptrend.

Bulls are firmly in control. Bears seem weak (if not dead) and incapable of inflicting lasting damage.

Short term trend is up. Mid-term trend is up. Long term trend is down.

Index has gone through several levels of resistance with relative ease. They have all become support.

Resistance is 955 (top of the 875-955 range), and 961 pivot (a long term level from 2003). Support is 935 (Jan 2009 top, July 1 peak), 923-928 (tested multiple times), 910-915, , 905, 896 (55 EMA), 893 (neckline), 875-885 (base of a W bottom) and the frequently contested 850


It may still be too soon to say, but it seems like the next leg of the high beta, reflation trade is warming up. Techies have stayed firm. Other sectors to watch are Materials, Industrial, and Discretionary, they all have turned up relative to S&P. South Asian Markets have turned up as well

There are now many intermediate buy signals on daily frames.

Bulls have taken the market back. It is their ball to drop. They need to stay above 935, and capture, and hold 955.

I leave you with these charts

Nas100 has been firm and strong. As long as the techies outperform, chances of a market collapse, IMO, are low.

Taking a look at the garbage land

It seems like risk is back, and uptrending. Will it last long? Who knows? Market is in a mid-term uptrend, and if it stays the course, it will gather momentum, and crowds will follow.

It is interesting that the lower quality junk (HYG) has been doing better than higher quality junk (LQD). That, to me, suggests that there has been appetite for risk -- that is supportive of the market rally

Have a Nice Day!