Stock Market Trading Demystified: Worst week in five months

SPX suffered a big drop this week, losing no less than 35 points.

SPX is now just bellow SMA 200.

There is now a fight between Democrats and Republicans about the nasty drop after elections, 48 points on SPX, which Republicans say is due to Obama's re-election. I don't really want to go into such discussion since I am not that interested in politics. If you want my 2 cents opinion here it is: as I mentioned a few times in the previous posts market was already in a corrective mode so a drop was more likely than a rally but at the same time is hard to believe that elections in the largest economy in the World did not have any effect on the market.

Anyway, back to market behavior, it's worth mentioning that the weekly DMI is now in red. You know that I consider this a pretty good indicator of the long term market direction. In a bull market, like we are now, a weekly DMI switch from positive to negative is merely a confirmation of a downtrend, not necessarily a good timing indicator. From previous times when DMI switched from positive to negative I noticed that market did drop after this event but not that much, the bulk of the plunge was already there. Since the SMa 200 doesn't seem to be a very good support (I am saying this because the other indexes are already bellow this level), the next big support is going to be the four years uptrend line that now is around 1,320 (or 12,600 on Dow). Please note that the March-June drop did not go all the way to the uptrend line, market starting a new uptrend before touching this level.

If you are investing long time you should not panic since the long term is still bullish despite being challenged at the moment by the negative weekly DMI. Since March 2009 SPX continued to make higher highs and higher lows. You should worry if market goes bellow the uptrend line (1,320) and especially if it goes bellow the previous low, 1,280. If it goes bellow 1,280 SPX is going to make a lower low that is not going to be good for the bull market.

On intermediate time frame SPX is bearish, as expected. On two hours chart SPX is 40 points bellow the declining SMA 120 and about 20 points bellow EMA 25. This is not that much, I can easily see another 10-15 points drop but more likely market will trade more or less flat next week unless some major news hit the market.

An ETF I previously mentioned is UNG, the natural gas ETF. As I said, UNG is now at it's most bullish momentum in 4 years. Notice the golden cross and the positive weekly DMI. Is trading in a pretty nice trading range and now is almost touching the lower edge. If, and only if UNG is going to find support at the lower edge of the trading channel, that is going to be a good entry.