S&P 500 - July 31, 2009

some charts courtesy of stockcharts.com

Mixed market dynamics. Friday was a second consecutive day of selling into close.

In the last post we discussed why the price action since the peak of July 27 could have been a consolidation. I also mentioned what looked like an assault on July 27 peak in the early trading hours of the future market.

It appears that my take of the early action was correct and futures markets powered on and took that peak. Market made it peak after 10:00 am, and then started to selling. Into the close, the selling got a bit intense. Perhaps a bit too intense for the Last minute buyers of Futures and ETFs to step in, or maybe they were among the sellers

Friday, saw more choppiness, and some good selling into the close

So, market had two days in a row of selling into the close. Does this mean the price characteristics of the market has changed and, at the very least, a pullback in underway? I don’t think we can answer that question yet.

As is typical with extended wave structures, the internal formation can be counted in different ways.

Remember the uptrend from March to July? That one, through extensions, opened itself to multiple counts as well (I even have a bullish count that violates no EW rules)

On the above chart, I can argue that the peak of July 30 was the a 5th wave termination point. I can also argue that it might be the 3rd wave of an ending diagonal, or the 1st wave of another extended third wave.

What do I do in situations like this? I just try to play by levels. We have already discussed 960-965 as a level bears have to take to show us that at least a pullback might be underway. I can now bump my levels a bit higher. Looking at this15-minute chart of the index

If the peak of July 30 is bettered (997+ cash index), then the waves are very likely extending. If 970 is broken on the way down, then the low of July 30 was very likely a 4th wave termination, and a pullback is probably underway.

Referring to the 15-minute chart above, the action of Thursday and Friday looks like a consolidating triangle, and it is imperative that I either do nothing, or observe very tight stops.

This is a 60-minute frame

Price rises incessantly against deterioring momentum. And that’s another reason why a trader should pick his spots and observe discipline. Looking at the chart above, Short term momentum has declined enough to set the stage for another assault by buyers of ETFs and Futures. I am not predicting anything, but merely emphasizing my point that we need a break of some short term lows to give the bears some more solid ground. On the other hand, a break above the consolidation range on the 15-minute chart above may send the shorts into another hurried squeeze.

These past two days, market sold into close, as we can see from this 5-minute chart of SPY


But the presence of the gap that opened on July 30, and the consolidating shape of the the price action these past two days makes it important for the short term bearish case that the 970 area of the index falls. Otherwise, index either consolidates further, or stages another assault on hapless bears. So far, the 990 pivot has so far kept the bullish endeavors at bay. If that fails, next pivot is 1018.

One pattern few talk about is a broadening top or Megaphone that seems to exist on S&P.

Market success seldom happens in crowded spaces. The fewer the participants of a certain formation, the better the chance of it success. If the smaller megaphone is to be successful, a descent to 850-860 may unfold. That would be against many predictions and projections that I see nowadays. It would also be against the positively aligned technical posture of the index as well. We just have to take it one level at a time, tune out the noise offered as expert advise and let the market take us where it wants.

Nas100 sold with more intensity than S&P

The trend of Nas100 outperformance is still intact. As I have said often, I do not think a meaningful pullback or drop can occur without a good selling of the techies, especially, since the techies held far better than other high betas during the June selling. I may be wrong thinking the way I do, but, so far, paying attention to the Nas relative performance has worked well

Another measure of risk that we have been monitoring from time to time is junk bonds

In June, the junk bond ETF (HYG) appeared ready to roll over, but then the mass execution of the bears happened, and risk came back in a big way

On July 20, I wrote

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

Are junk bond players wrong? Do they know something we don't? Does it matter? I guess time will tell. For now, we have an uptrend and an apetite for risk. Will that change tomorrow? Your guess is as good as mine.

Let’s Wrap Up:

Index has so far defied short term deteriorating momentum, giving back only a few points on declines.

Bulls own the market. It is their ball to drop. Bears seem weak (if not dead) and incapable of inflicting lasting damage. Watch for signs of distribution. So far, it’s been accumulation and consolidation.

Short term, Index appears in a consolidating pattern, a close below 970 is needed to invalidate that, otherwise, index may gather energy and attempt another high.

Mid-term, index appears in opposing patterns, an Inv H&S and a megaphone, broadening top, attention to support and resistance levels, and price action with respect to MA alignment is advised.

Short term trend is up (a close below 970 may change that). 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 990 (tested, and rejected a couple of times already), and 1018. Support is 984, 961 pivot (a long term level from 2003), 955 (top of the 875-955 range), 935 (Jan 2009 top, July 1 peak), 923-928 (tested multiple times), 910-915, 908 (55 EMA), 875-885 (base of a W bottom) and the frequently contested 850

There are well established intermediate buy signals on daily frames.

This is not a run substantiated by hard-core, blue-collar, non-governmental, honest-to-goodness econo-data. So far, it’s been a run made by printing money, bloated-and-bloating national balance sheets, constant propaganda, and super computer purchases of ETFs and Future contracts at critical junctures. The intent seem to be to get every saved dollar either invested or destroyed. The run may go on forever, or cease any moment. Having large, unheged/uninsured positions is, IMO, playing fast and loose with cash.

------------------------------------------------------------------

A friend, and colleague, Gabi, left a comment saying a chateau is a proper place to vacation after a good year. It is actually a chalet, duplex, fully equipped, with a large terrace overlooking a beautiful lake, surrounded by lush green mountains. We just came back from a few hours at the pool, the family is retired for an afternoon nap, and I am sitting on the terrace, enjoying a cool breeze, and typing this.


There is a very nice village nearby that has a pedestrian street going up a steep hill and flanked with shops, cafes and restaurants.


Yesterday evening, the village was full of people and music


Bill Zimmer of prudenttrader.com kindly left a comment that I should stay away from the markets while I am on vacation. I will try Bill, I will try :-)

Enjoy The Rest of Your Weekend!