Friday, February 4, 2011

Very dramatic week

After a 23 points down last Friday SPX managed to rally this week no less than 35 points! Unfortunately, I've got a pretty nasty whip-saw price moved bellow SMA 120 but I also got an EMA crossing. It's the second time, in a row when the system gave me a bad "sell" signal. In November was not actually too bad, only 5 points and the two signals where spaced out, two weeks I think but this time I've got a "buy" signal immediately after I've got the "sell" one. Last time this happened was on November-December 2009 when for 6 weeks I've got many false buy and sell signals. Every system has its own limitations!

Obviously the market is now bullish on all time frames. On long time frame was bullish anyway even with last Friday drop, but I was hoping that the intermediate time frame turned bearish for good and we were going to have a nice downtrend. I like nice downtrends because they are also followed by nice uptrends and viceversa. If market continues in one direction for too long you can feel that is "tired" and starts having these big moves ups and down from day to day which are not good for my health :)

On short term market is getting once again overbought, meaning we may see another drop at least bellow both EMAs if not challenging SMA 120 again but without necessarily seeing a change in trend. Onc the trend changes market can stay as much as 30-50 points above SMA 120 for a few good weeks. After that price gets closer to SMA 120 and every time it gets more than 20 points above SMA 120 the chance of a short correction on short term is getting pretty high. In January I warned you at least 3 times that market was overbought on short term, now I am doing it again. Please notice that SMA 120 is climbing 2-4 points every day so even a few flat days in a row can get rid of the overbought condition.

Looking at the weekly chart there is a potential level of resistance ahead,1320, that corresponds to both April's 2006 high and to the end of a very "busy" area, 1220-1320 according to "volume at price indicator".

All the best!


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