S&P 500 - July 6, 2009

chart courtesy of stockcharts.com

Index closes in the green.

We pointed out short term oversold conditions, said that we expected the completion of a 5-wave set and a bounce, and that’s what happened.

Volume was, again, below average but more than Friday. Breadth was negative.




One thing that bothers me about the market action is lack of volume, or rather a declining volume pattern since May. Add to that the reports from bloggers like Tyler Durden of Zero Hedge about the amount of program trading and we get a picture indicating lack of interest by actual people who would, in normal times, buy shares of actual companies listed on this index or that. This lack of volume participation makes me suspicious of market moves, up, or down.

It is what it is and all I have is charts. I also have instruments of hedging in case I really am paranoid about a position I take.

Index broke below the neckline we have been discussing for a few days.

The break below the neckline coincided with deeply oversold conditions and an apparent 5-wave completion, from which, the index bounced. The bounce took the index back above the neckline. To me, it’s no dice, and neckline is teased and tested, but not broken – not yet.

As I have been saying, every market participant with a chart is aware of the H&S on the chart above, and market has a tendency to disappoint the expecting majority, so, it is very important to observe how the index behaves at this point and see how any bounce unfolds in terms of wave structure and momentum profile.

If I wanted to short anywhere around here or higher, I would set my stop somewhere above the high of July 1.

This is a 15-minute chart of the index

Based on the ferocity of the drop from the peak of July 1, I am inclined to view the recent 5-wave move as a wave 1 of sorts. A move above 915 may be a warning that this interpretation may be wrong. A move above July 1’s peak will invalidate the scenario altogether. So, for now, I am short, I am hedged, and I am waiting. If I detect signs of weakness below the peak of July 1, I may add to my shorts.

This is a 5-minute chart of SPY


There are two gaps. One being filled, and the other around 91.5 which coincides with 915, which we just discussed as a level of warning to shorts, and 62% retracement level of the drop from the peak of July 1.

Let’s Wrap Up:

Index bounces from short term oversold levels

Price is close to the bottom of a wide range (885 – 965) that has the potential of containing index action in coming days, and frustrating the hell out of bulls and bears alike.

McClellan Oscillator looks weak. Bulls need to take it above zero.

Short term trend is down. Mid-term trend, as defined by OEW trend determination rules, is up. Long term trend is down.

Many sectors, many international indices, as well as the DOW are in confirmed downtrends. It is very likely for S&P to join them.

Resistance is 898 (55 EMA), 905, 910-915, 923-928 (tested three four times already), 935 (Jan 2009 top, July 1 peak), 950 (pierced and lost three times), and 961 pivot (a long term level from 2003). Support is 893 (neckline), 875-885 (base of a W bottom) and the frequently contested 850

The high beta, reflation trade that has defined this rally has been weakening for quite a few days. Are we going to see a rotation into defensive sectors (Healthcare, Staples, Utilities) typical of an end to a rally?

All intermediate sell signals are still intact. Bulls have quite a bit of work in front of them to reverse the situation. A move above 930 may put the bulls back in the driver seat.

I leave you with these charts

Nas100 held on to 1440 support. It does not look very strong in the chart above. For now, it has the support of 55 EMA and the overhead of 21 EMA. If we are witnessing the early stages of a meaningful decline, I would expect the techies to underperform.

Nas100 has not yet confirmed a mid-term downtrend.

Denied at the close by 55 EMA, this is a weak picture. The downtrend, as measure by ADX has not picked a lot of steam yet, it is something to keep an eye on in the hours and the days ahead.

Have a Nice Evening!