Saturday, July 30, 2011

Higher high or triple top?

I am in a long-really-needed vacation but I am trying to put some thoughts together since market is once again at a very dangerous junction and I thought some people may find this interesting.

Overall market continues to remain bullish but on shorter time frames I noticed serious signs of weakness. First of all let's have a look at the longest time frame, bull market vs. bear market. any signs that this bull market is ending? At this moment the answer is NO. Market was in a far worse position during the May-August plunge last year. As you remember I am using EMA 100-EMA 200 crossing plus SMA 375 to separate a bull market from a bear market. The pair of EMA's functioned really well in the last 20 years and I don't see any reason why is not going to work well again. SMA 375 has worked well at least since 2003 but only for SPX. On the other hand EMA 100-EMA 200 crossing worked well for all indexes over the last 20 years. 

As you notice there is no sign that these EMAs have any intention to cross over. They are actually going up right now (please pay attention that I am showing the weekly chart and the EMAs are EMA20-EMA40 with SMA75 as a confirmation). SMA 75 is around 1,210 and this is the level where a new bear market could start. At that point I am pretty sure EMA 20 is going to cross over EMA 40. 

Remember on what time frame are you trading. If you are for the long run you are still safe on your longs. If your time frame is shorter than bull market vs. bear market signals then you should pay attention to a potential triple top formation exactly as on October-December 2007. What you need to look for is market slipping bellow the 1,250 low. If this happens the probability of going bellow the key 1,210 level (as of today) dramatically increases. 

For even shorter time frames please pay attention that SPX found support exactly at the 2009-2011 bull market uptrend line, 1292. SMA 200 is also around 1,292 so this is a very important level. Of course everything depends now of the debt ceiling debate but technicals are also important since it can tell you where are the most likely levels market is going to find support if is going to go down. So have in mind three levels, 1,292, 1,250 and 1,210. 

Daily DMI it's obviously deeply in red but weekly DMI has also switched to red. Notice that it went green-red-green-red in just a matter of weeks. This rarely happens on major indexes indicating a lot of confusion at the moment. 

All the best!


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