S&P 500 - July 17, 2009

charts courtesy of stockcharts.com

Tight trading day. Another OpEx week is behind us. This one lived well up to fame and expectation. Just ask those who were short S&P.

So what now?

We said we had a wave set that looked complete and that a pullback would be probable. S&P pulled back but not much. Looking at this 15-minute chart

It is possible that we have a wave 4 in place. That is just one possibility out of many. Watch the momentum support areas I have identified for possible signs of short term weakness.

Seeing the action of the past few days, watching every intermediate sell signal reversed, and looking at multitude of support on the chart above, I have to either stay aside, or side with the bulls.

As I said, my plans, at this moment, are to add on weakness. And, for now, I have a hedge-and-increase strategy. Since techies are leading, I may keep playing Nas100. Of course, I may change my plan in a second. S&P is still in the wide range of 875-955 that we have discussed. It already has given one false break to the downside. It may also give a false break to the upside.

So, first order of business is to try not to lose much. Second order is to wait for weakness, tip-toe in a little and take partial profit and hedge the rest. And, hopefully, repeat.

The area of 955 offers a unique opportunity. An adventurous speculator may place bets to the upside and downside of that level. But he/she needs a clear strategy of playing it. There are a number of option strategies that can be employed. I like spreads, and may play them here.

One think I need to remember is that if I am having a wave 1 in front of me like this

It probaly has at another thrust in it for a lesser degree wave 5. That may take the index above June high, bring in momentum players and then start a pullback for a wave 2. The above is my most preferred count right now.

Alternatively, If I am dealing with a wave C, like this


Then it appears like we are either done, or will soon be after a choppy finish like an ending diagonal for an extended 5th. The index should soon start drooping with a nice 5-wave move down. The above chart is my least preferred count at this point.

In the middle, there is my personal favourite, which is different than my preferred as an analyst


This, if it comes to pass, will frustrate the hell out of all animals of the market. Only a fast sideways lizard may survive it :-)

Let’s look at a 4th one as well


My intention is not to confuse you, or me. I just want to show you how indeterminate the state of the index is right now. And emphasize the importance of staying unbiased, and Perma-Free. We should pay attention to levels of importance and see how price behaves around them.

Speaking of which, I should note that Techies are now in a mid-term uptrend. It is no guarantee that S&P and the general market would follow and reverse their existing mid-term downtrends. Different markets can be at different stages of their wave development.

But given that Bulls are in control, ETF and future buyers can always attack, bears are just weak, every internal measure has now improved, and we had good volume for a change, I expect S&P to be in a mid-term uptrend as well.

Market does not care what I expect, so, again, I shall follow my charts and try to not lose much.

For the day, volume was above average. The market action felt cagey and narrow. Breadth was negative.

There are many recent positive developments on the chart above and the one below

I know all the arguments about the economy. But looking at the technical picture, I wonder if perma bears are not out of touch, again, with the immediate reality of the market.

If there is an imminent collapse brewing, the charts are not showing any sign of it. If I am nervous, I can trade smaller and take precautionary measures. If I am really paranoid, I can stay out. But bears have quite a bit of work to do when I see a picture like above – a market with improving technicals.

Let’s Wrap Up:

S&P’s mid-term downtrend is in danger of quick reversal. Nasdaq composite and Nas100 are now in mid-term uptrends.

Bulls are running the asylum again. Bears seem weak (if not dead) and incapable of inflicting lasting damage.

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

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

Resistance is 950 (pierced and lost three times), 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 is too soon to say, but it may be worth watching for signs of the next leg of the high beta, reflation trade. Techies have stayed firm. Other sectors to watch are Materials, Industrial, and Discretionary.

MACD gave a cross up today. A/D line and McClellan Oscillator have mended themselves. Market has reversed all my intermediate sell signals. There are now intermediate buy signals on daily frames.

Bulls seem to have taken the market back. They need to stay above 935, and capture 950.

I leave you with these charts


Isn’t this beautiful? It never broke! Despite the mistake I made on Wednesday, I am proud of the way I have handled the market. I stayed with QLDs throughout. One thing that helped me keep my position when bears were calling for the end of time, again, was the fact that I had hedged at a good time and bulk of my profits were guaranteed. As I mentioned, I have added these past days. I hedged again on Friday. If I can, I will repeat the process. But first, I need a pullback to ease the overbought conditions on short term frames. Patience is the mistress of reward. Chances of hitting a home run like this are small. Chances of running bases are very good.

If you want to get a bear going, just start talking about Heads and Shoulders ;-)

Well, there is another potential one, this time a much larger Inverse one, with bullish implications.

Neckline is around 950. I would like a better developed right shoulder if I can get it. We’ll see how it works.

Do not get me wrong, I am not calling a new bull market (although I have a bullish wave count as well). I am not even saying that the rally will last for long. I don't know. I don’t even care that much.

I am just saying that technicals look positive.

They may turn down, but for that we need fresh bears again. The most recent batch was just slaughtered. So, watch for signs of accumulation, or distribution, and pay attention to the trends across multiple time frames. Just holding longs or shorts without any exit plan is, in my opinion, playing Russian Roulette.

On a macro level, markets seem to be pricing better days ahead. Right or wrong, manipulation or not, printed money or what not, that’s what they are pricing. There is no hard, un-massaged, non-governmental economic data to support such pricing. This dichotomy will resolve, perhaps very violently, at some point. I do not know whether that resolution will be to the upside or downside. All I can do is to play it one level at a time and protect myself against a sudden turn.

Before I wish you a good weekend, I would like to suggest Jon's Stewart's take on US economy. Just click on the picture below


Enjoy the rest of your weekend!