Sunday, April 19, 2009

Technical update 14.09

Week 6 of our "super fantastic new bull market" (to paraphrase CNBC) packed on a few points in all the major indices. The rally in the S&P has now measured 31.3% from the bottom, which is a 23% retracement of the entire Oct '07-Mar '09 move.

Based on the market internals, sentiment indicators and the like, I am sticking with my assessment that this is not the typical quick, shallow bear market rally. Rather, it is a longer, psychological adjustment that will set the stage for a substantial move lower in the latter half of this year and next. It will do so by convincing as many people as possible that the worst is over and blue skies lye ahead.

I'll try to outline the potential targets for the move below. But remember that surprises in bear markets come on the downside. I could dream up a dozen scenarios where the rally is prematurely aborted in favour of a violent move downward. There may be better low-risk opportunities to try and participate in the rally (on a large pullback, for example), but using a tight stop-loss would be a necessity. Trying to jump in now could prove suicidal - even though a buying panic may be near.

S&P 881 - 23.6% Fibonacci retracement of Oct '07-Mar '09 move
S&P 962 - the falling 200 day EMA (would probably intersect 950 after a few more weeks)
S&P 999 - the falling 50 week EMA (would probably intersect 975 by the time price got there)
S&P 1097 - the falling 20 month EMA (would probably intersect 1000 after another 3 months)
S&P 1013 - 38.2% Fibonacci retracement of Oct '07-Mar '09 move
S&P 1050 - Trendline of underside from Aug '07, Jan '08, Mar '08, Aug '08 (downsloping)
S&P 1044, 1007, 943 - October, November and January highs

The same indicators in the Dow or the Nasdaq could prove to be more prominent. It is not the levels themselves, but rather the reaction to the levels that is important. Quite often, the important moving averages will prove too ambitious for a weak market (or will overshoot for a strong one).

I will be watching the performance around 940 for clues as to whether the rally is reaching an end. Ideally, I'd like to see a large pullback in the near term before we got to those levels. Another major factor we should be considering is time. This rally should last longer than just the 6-8 weeks that the other, smaller corrections did. The previous move was 17 months in duration. If the Elliott Wavers are correct in their assessment of this as a "primary wave 2" rally, it should at least come close to lasting 1/3 of that period (or at least 5 months). However, the top could come in the first half of that (soon) and be followed by some chop and failed attempts to surpass it throughout the summer.

If 940-950 is easily surpassed, I just don't see it getting much further than the round number resistance and minefield of other resistance around 1000. But we'll obviously have to cross that bridge if and when we get there. By that time we'll doubtless have a number of positive or negative divergences and sentiment hints to guide us. Again, something that only time can provide. Perhaps we'll be able to find some clues in the Put/Call ratio (a break of the trendline below maybe?)

The Euro looks like a disaster waiting to happen. I'm becoming more and more convinced that the next overall market leg down will be sparked by a crisis in the currency.

The only thing I can find that looks worse than the Euro is Silver.

That's all for now.

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