I would be completely remiss if I did not point out once again the important juncture the market finds itself in right now. The chart above is one which I believe LOTS of people are focusing in on right now. Why?
Well because the chart above (by the way, it is the weekly price chart) helps to summarize the market in a nutshell and defines some very important parameters that could be very key going forward.
First, it shows the entire extended bear market leg from 2007 into 2008 and then the current massive retracement higher right up to the red colored down trend line that defines this bear market. So we know that the market at least as defined by the SP500 is perched right under long term resistance. We also know that this is the THIRD attempt back up to the red down trendline. The fact that it is the third attempt can be important because usually you will get a successful breakout on third attempts.
But we also know that the SP500 has rallied right back up to the 50% fib retracement level and at least as of now has not been able to break up and through this level. I believe those in the fib crowd will tell you that if a market retraces up and through the 50% fib retracement level then it gives a very high probability that the previous major low (in this case the March 2009) lows will be a very solid low that is not likely to be broken.
However if the 50% fib level holds here and we break down from here it may leave the March 2009 low more vulnerable.
So you have the red down trending resistance line and a 50% fib retracement level here that are acting as resistance. It is worth pointing out that the Nasdaq Composite has already busted through its bear market down trend line and also busted above the 50% retracement level.
Anyway I think my main point here is that being cautious at this juncture is not a bad idea. Yes there are still plenty of bullish setups out there, but if you look at the SP500 chart above all of that can change on a dime.
Also the XLF financials ETF looks quite weak and I would say a downside break through 14 level could accelerate some bearish feelings in that market and others as well. The XLF is a weak looking index. It has evaded bear signals what seems like forever, but I can tell you that if 14 is broken decisively to the downside then we may really finally be ready for that 10 to 15% correction I have been talking about. The reversal candle in the XLF looks very bearish to me today combined with the high volume and the way it engulfed the last 3 trading days.
I cannot say for sure whether or not the XLF still has that broadening topping pattern anymore. It may. And I know that these can be long forming patterns that do not crack until the last minute.
If the market starts cracking here then gold will likely get hit too. I sold TLR today just to be on the safe side and am a bit concerned on its lack of follow through. I may jump back in in the next few days but I want to be real cautious at this juncture in the market.
The dollar index looks like it is pinned below the 75 level and may stay below there until end of year which could help hold the market up for a while longer.
So in summary, a good idea to be on the look out for trend change here or at least open to the possibility.
Consider this:
And great article on the gold and the S&P,
To add my 2 cents, let me make a scenario for your consideration. Wall st. as a whole has outpaced the economic recovery by a long shot. Everyone knows the reason is because the market makers think six months in advance and anticipation of growth led the market to where it is now. “That was easy money”. Now my common sense tells me that investors don’t want to lose their hefty gains until the year end for the simple tax advantage. That would explain the lack luster days we have had and it would be fair to say we will continue. To get an idea of where the S&P will be and the general market going into 2010, look at the conditions.
1. Overbought, overbought, overbought “ it cannot be argued”
2. Inflated commodities “ I think my neighbor just bought some gold”
3. Only a fractional change in economic recovery “can you really call it a pattern?”
4. A dollar that is going to be propped up by an early fed interest rate rise. “they can’t afford to let inflation get ahead of them”
If Bernanke gets reappointed he will be more aggressive on fiscal policy. He got it handed to him during his Senate renomiation meeting for clearly misinforming the committee about fanny and Freddy and a host of other major blunders. The market is talking about inflation, Ben is already drawing up the paper work.
In closing it may be just that easy again, the S&P needs a break and in conjunction with your article of retracement look for the biggest secret on wall st. 200SMA.
Thanks for your comments. Nice post. You make a lot of good points. I think the correction in gold, although only one day so far, could be a leading indicator of the beginnings of the broad market correction. I don’t have a clue about what the Fed’s plans are and have not been watching bloomberg or CNBC at all lately, but I suspect maybe they are talking about how the Fed will change their language next year to reflect the recovering economy and support the dollar. How soon they do that is anybody’s guess.
I have to say though that I am really confused about inflation. Gold is at record all time highs and going up straight since 2001 and one would think inflation would be raging at this point, but at least according to government statistics it is still contained. Perhaps the question is, can inflation come out of nowhere and suddenly explode higher for a 6 month period and cause gold to spike higher in a blow off. That is unknown to me, but if true, it could catch the Fed off guard and cause them to scramble to play ‘catch up’ and try to chase inflation. The weird thing about new trends is that they can come out of nowhere and be temporarily persistent. But I can’t predict when or if such a thing could happen.
But the technicals do seem to suggest that change is at hand soon, perhaps on the change into the new year.
The market going sideways for 5 months to 2 years is probably not widely expected now, but is definitely a possibility at this point. The key point is that the market needs to build cause for the next move, I think it has used up most of its ‘fuel’ for the current run.
On the other hand we still have not yet seen the real technical break down in price and tape action to convince me we are there yet. Your point about ‘them’ holding the market up till year end could be correct, seems logical for it to play out that way.