Wednesday, June 9, 2010

Bearish momentum continues

As I said yesterday one should not get too excited about one up day since the support levels are weak and the resistance levels strong. Today SPX bumped into the 1075 resistance level then went down like a stone, and 1075 wasn't even a very good resistance level, just a decent one. At least SPX did manage to stop exactly at the February low, 1055. For now!

As you probably noticed on the daily chart, EMA50 has started crossing EMA100 from above. This is extremely bearish long term. My first sign that an index is turning bearish on long term time frames is when DMI is getting negative on weekly charts. The second sign is the price slipping bellow SMA200. The third is EMA50 crossing EMA100 from above on daily chart. If on top of this 3 signs SMA200 is sloping down the index has slipped into a bear market almost for sure.

Let's compare now the 2003-2007 bull market with today's market (weekly charts). As you notice the bull market started in March 2003 and run without any problem until March 2004 when started showing signs of weakness. First you can see DMI turning negative, then the index slipped bellow SMA200 and finally EMA50 crossed EMA100 (EMA10 and EMA20 here since we are weekly charts). However, SMA200 continued to rise a little bit. The market traded in range until the end of the year then went up again. We MAY see a similar scenario here. I know the anti-technical analysis crowd will complain again "history doesn't repeat" and indeed history doesn't repeat but it rhymes. Of course every recession is different so the fundamentals are different but the crowd's psychology remains the same. The fact that SMA200 is still rising right now is a very good sign for the bulls who may worry a new bear market is knocking at the doors but I want to warn them that it takes time for SMA200 to change direction so only time will tell if the plunge we are experiencing now is a very strong correction or the beginning of a new bear market. So let's keep a close eye on SMA200 for the next 30-60 days to see if is going to slope down or not.

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