On our last blog we mentioned that there was still downward pressure in the market. Specifically we expected that the S&P mini would test the 1267-1270 range. This range was a 78.6% retracement of the previous wave. We see time and time again that the 78.6% Fibonacci tends to be the last holdout. A meaningful break of this level usually means that the previous swing high or low will be tested. In the case of the S&P – we are talking about the March swing low.
On June 8th and 9th our support level was tested. It seemed to provide a temporary pause of the downward pressure. However, the S&P continued to move lower making an intra-day low of 1252.25 on the 16th. On Friday, we closed at 1266 (once again flirting with the aforementioned support level). As a side note, I love the fact that the popular financial media declared last week a huge success. To us it still feels like a sick/confused market. Opinions aside, let’s review the technical indicators and try to determine where we go from here.
Many technicians like to use a 200 day moving average as a general proxy for trend. Simply put if the markets are trading above their 200 day moving average we are in an up-trend and if markets are trading below we are in a down-trend. Of course, this is a seriously lagging indicator (especially at market transitions – from bull to bear and vice versa). With that said, sometimes it does provide an interesting component when trying to broadly assess the overall health of a move.
It’s worth noting that both the DOW Industrial avg. and the S&P Cash remain above their 200 day exponential moving average. As you can see from the chart below, the S&P flirted with the 200 day average at its intraday low on the 16th.
Will this be the necessary support to help stop the bleeding and usher-in the next bull move?
We now turn to our Market Mentor Edge tool for additional data and support. One indicator that instantly grabs my attention is the McClellan Oscillator. Though not perfect, the McClellan has been a useful tool to use to help identify swing lows. On November (2010) the McClellan reached an oversold level on the 16th and the 17th. Both of these days coincided with closing lows in the S&P. Then again on March 15th and 16th (2011) the McClellan reached oversold levels. Once again this correlated to an S&P low on the 16th. Most recently, the McClellan reached an oversold level on June 8th, June 10th and June 13th and the S&P didn’t disappoint. This seemed to be a catalyst for last week’s rally.
So how do we make sense of everything? On one hand, you can make a case that the market held support at the 200 day MA. Not to mention that the McClellan signaled a potential rally. However, we believe that all rallies need to be treated with a degree of healthy skepticism. The NASDAQ is negatively diverging from the other markets as it took out its March lows. In addition, Walter Bressert’s Double Stochastic is in the over-bought territory while Bressert’s B-line is still in a down mode. Essentially both indicators are on opposite sides of their respective ranges. This is like a gun that is locked – loaded and ready to fire. If the Double stochastic rolls-over it will signal another thrust down that should easily test the March lows in both the DOW and S&P.
For now, we will gauge how long this rally lasts and where it takes us. Here are the immediate resistance levels to watch in the S&P mini.
1267-1270 (as previous support becomes future resistance)
1285-1296 (April swing low + 38.2% retracement of May high to June Low + 89 exponential MA)
Traders should remain on high alert and not fall in love with either side of the market!
Happy Fathers’ Day for the Dads that are reading this and happy trading!