Tuesday, June 7, 2011

Weekly DMI has turned negative

Maybe Bernake is right and we are not going to see a double dip but expect further plunge from here. On of my major technical indicators, weekly DMI, has turned negative! Except for two minor whip-saws weekly DMI was a fantastic prognosticator of every major leg up or leg down.

Let's have a look further back, since the beginning of the recession back in 2007. As you can see weekly DMI gave an excellent exit point around 1450 on SPX. The bounce up from the bottom was very fast and weekly DMI turned positive only around 900. Still good enough to capture 550 points on the short side. After briefly turning negative on June 2009, weekly DMI turned positive and stayed that way until January 2009 when again turned briefly negative. In May 2010 did turn negative big time signaling a major plunge (May-August). At the beginning of October it did turn green signaling a long rally that probably end it yesterday.

Extreme lows or highs on weekly DMI are also good indicators of "overbought/oversold" levels. Remember in February I told about an excessive high on weekly DMI. A week after that SPX suffered a pretty violent plunge from 1340 to 1250.

Since I am talking today about market on the long range let's have a look, again, at the pair of EMas that did signal the beginning or the end of every bull market in the last 20 years. I am talking about EMA 20-EMA 40 on weekly chart (EMA100-EMA 200 on daily chart). As a confirmation I used SMA 75 on weekly chart. SMA 75 is now around 1,200 so we should look at that level as the best support level. If SPX goes bellow 1,200 in the next few weeks we are back to the bear market. EMA 20 is slightly moving down but EMA 40 is flat at this point so on long term market is still safe on the bullish side.

On daily chart it's obvious that SPX went outside of the downtrend channel. We are probably going to see attempts to climgb above the lower edge of the channel.

All the best!


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