S&P 500 - July 7, 2009

chart courtesy of stockcharts.com

S&P confirms mid-term downtrend.

Index finally stopped playing coy and joined a myriad of sectors and indexes, domestic and international, and confirmed a mid-term downtrend.

I really thought that index would do a more meaningful bounce today than it did, but as we all know, market does not care what I think and the onus in on me to adapt.

The neckline of the H&S pattern broke again today and index closed below it. If this is a truly impulsive wave down, index has no business being above 900 area any time soon.

I hope you realized what I am doing here and how I am playing it. First we had the Peak of June 11 that we said should hold or else. Then we had the peak of July 1. And now we have the 900 level. The reasoning is the same: if the peak is the beginning of a clean 5-wave structure, it should not be violated before we have 5 waves.

If the H&S is going to play to its potential, it should give us a theoretical target in 820-830 area.

For the day, volume came below average, but slightly above yesterday. Breadth was poor

Take a moment and review the annotations on the chart above. It is like gathering clues to solve a mystery. One does not need an extensive diary, a couple of annotated charts should be enough to capture one’s observations, and thoughts as market action evolves over time.

We have been using McClellan Oscillator and the Summation Index to our full advantage. They are both weak and badly in need of some bull spirit. It was only a couple of days ago when we talked about the downtrend line on McClellan Oscillator and wondered if it could be breached. Since then, index has suffered a great deal of internal deterioration.

This is a 15-minute chart of SPY

ETF buyers did not show up yesterday and the mid-term uptrend since March ended.

Not much else to say really. The most important question for me at this point is whether the peak of June ended the primary wave B, implying a lot more selling and much lower prices, or was the end of major wave A, in which case what we see now is only a correction.

It is early for an answer to that question. I just need to wait and observe how the price action unfolds in coming days.

To Wrap Up:

S&P 500 confirmed a mid-term downtrend. It is too early to say how deeply the downtrend may cut.

Price broke below the neckline of a Head & Shoulder. If successful, it theoretically measures to 820-830.

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

Resistance is 893 (neckline), 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 875-885 (base of a W bottom) and the frequently contested 850

At the very least, the first leg of the high beta, reflation trade that has defined this rally is, in my opinion, finished as we start a downtrend in all major indexes and many sectors and international markets.

All intermediate sell signals are still intact, and well established. 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, but before that, they need to get above 900.

I leave you with these charts

Nas100 finally buckled. Notice the higher than average volume today, and the hard close below 55 EMA. We anticipated and navigated this one beautifully as I pointed out the underside of the trend line, 21 EMA, 55 EMA, the 1440 level, and the money flow that turned negative recently.

Also notice the recent underperformance versus S&P.

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.

Have A Nice Day!