Tuesday, July 6, 2010

Bears refuse to take a break

Another terrible week for the bulls with SPX losing another 50+ points and major support lines being broke on the downside. The most bearish event, on long term, is the break out of the 1067-1105 trading range then  bellow 1050, the previous daily low.

On intermediate time frame I see the downtrend losing a bit of momentum. I judge this by looking at the DMI, that is almost turning bullish on 30 minutes time frame. Unfortunately, DMI on 30 minutes charts is not very reliable but if DMI turns bullish on 60 minutes chart, I'll take notice. So if you still have some longs in your portfolio better wait for a little bit longer to see what happens.

Two possible resistance levels ahead, one is the most recent downtrend line that now is around 1035, the other is, obviously, 1045 (or 1050 on daily chart) the former support line. A short term rebound towards these levels is possible (look at 60 minutes chart).

Another hint about of a small rebound comes from the daily chart where you can see the price just a little bit above the downtrend line. However, a drop bellow this line is going to be really painful for the bulls.

What is the bigger picture? Many scenarios are flying around, we are going into a double deep recession, we are going bellow March 2009 lows, Dow will go down bellow 1,000... You heard them all. Personally I don't really care if thismarket is going to hit 2,000 on SPX or 200. Of course I do care if the economy is heading up or down, we all have jobs, friends and families, but for the purpose of trading it doesn't matter. What it matters is to be on the right side, either long or short. So, when i say the bigger picture I am not referring to any of these scenarios, I am just looking at longer time frames (weekly charts) to see what messages market may send from there.

I am not fan of looking back at charts and saying "ah, I was supposed to buy here and to sell here". Anybody can do this, the real challenge is make these decisions in real time. Another trap is when comparing this recession with others in the past. Which one to chose, 1973-1975, 2003-2007, 1929-1933? We need to have a look at these past recessions but we need to be very careful about the extend of our conclusions. Every recession is different.

Let's have a look at the famous "head and shoulder" pattern. We do have a left shoulder around January's high, a head in April and a short right shoulder in June. the neck line according to weekly chart was around 1060. If I measure the distance between the top of the "head" and the neckline I am getting around 150 points. Subtracting this from 1060 I am getting 910, a level where the plunge should stop. I must say I am not fan on "head and shoulder", since you can imagine "head and shoulders" at any time and any place. Only a few of them are real. What you need to be concerned as a bull (or happy as a bear) is that SPX went bellow a multi-months support line, the one that 'head and should" fans consider now the "neckline".

The irony is that this time the "head and shoulder" prediction may be right. I am saying this because coincidentally the 2007-2009 recession downtrend line is around 930 which constitutes the major support line for the 2009-2010 rally.

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