SPX – 1103.25
DJIA – 10,390
December 8, 2009
“The data tell you that we are late in the bull market. They don’t tell you that it is over.”
-Phil Roth, The Wall Street Journal, December 7, 2009
The S&P 500 (SPX) reflects the intelligence and opinion of investors, recording the interplay of politics, economics and finance like a seismograph measuring quakes and shocks. The stock market is generally unpredictable and I operate under the belief that the best forecaster is market action itself. There’s been a pause in the SPX’s pendulum swing from its bear market low, right at the declining trendline from its October 2007 bull market high and just below the halfway point of the 2007-2009 bear market (1121.44). There hasn’t been much selling and prices are locked in a tight four-week trading range.
S&P 500 – Weekly (Source: DecisionPoint.com)
Most consolidations end with prices exiting in the direction of the trend that existed prior to the range but the plan is to be prepared in any event. New buys or sells in the middle of the range make the least sense and increase the risk of multiple whipsaws. The best approach, in my opinion, is to buy the bottom of the range as the dip passes (with a tight stop) and to add to positions on a breakout. Vice versa, be prepared to trade the short side if market action indicates an intermediate-term downtrend.
The S&P 500 (SPX) popped above its November 16th high (1113.68) three days running to finish last week but didn’t hold. I figure a close above that high would indicate the market had been under accumulation and was now pointing to higher prices. Conversely, a close below 1082.50 would indicate distribution and the likelihood an intermediate-term correction is underway.
S&P 500 – Daily (Source: StockCharts.com)
If prices spike above 1121.44, the next resistance points are 1136.35 (75% of the 1974-2007 range) and 1144.78 (62% retracement of the May 2008-March 2009 bear market leg). If prices correct, there’s potential support around the October 2 and November 2 lows between 1019-1029.
The rules are simple- trade with the trend, cut losses and let profits run. Execution is more demanding and the most important attribute for success is discipline. It’s best to stay open-minded and plan for different scenarios. As Confucianist Scripture points out, “There were four things from which the Master was entirely free. He had no foregone conclusions, no arbitrary pre-determinations, no obstinacy and no egoism.”
The Market Trend Indicator (MTI) still signals Uptrend, a reading that stays in effect until one or more its key indices closes below their respective 18% weekly exponential average. The SPX’s 18% average is 1074.81 and the DJIA’s is 10,059. The New York Advance/Decline line is 5,035 net advances above its 18% average.
Net volume indications are mixed, fitting for a trading range scenario. The peak NYSE net volume reading last week was +32.5, barely overbalancing its (31.9) hurdle rate. However, price strength to date ws insufficient to indicate an acceptable short-term rally. My rules require a higher three-day moving average SPX price for at least three consecutive trading days. Price qualified for the Nasdaq 100 (NDX) but NASDAQ’s peak net volume reading was only +36.5 compared to its (42.6)hurdle rate.
As for sectors and groups, it remains a mostly contrary market best suited for traders with a buy weakness, sell strength mentality. New groups to the top ten relative strength list include the more defensive Multiutilities and Personal Products. The most desperate companies provided the best performance for most of the bull market but I suspect the “law of values” is likely to assert itself from here, as indicated by the subtle shift from small cap stocks to large cap. And note in the chart of the New York Financial Index that financial stocks are lagging.
New York Financial Index – Daily (Source: StockCharts.com)
In other key markets, long-term government bond prices rallied close to my stop point for my short sale recommendation (just above the TLT’s October 20, high of 97.25). I think it makes sense to low that stop level a bit to just above the TLT’s November 30 high of 96.73.
Barclays 20-yr+ Treasury ETF (TLT) – Daily (Source: StockCharts.com)
The U.S. Dollar index put in an outside reversal last week, overdue as its weekly swing chart was in its 13th swing. I suspect the rally has further to run. A trade above 75.93 turns the intermediate trend up under the 21-day rule and a trade above 76.82 (the last 3-day swing high on November 3) would confirm that observation.
US Dollar Index – Weekly (Source: StockCharts.com)
The sharp correction in gold prices is barely a blip on longer-term charts. My bias is an expectation that prices could get crazy in 2010 as the stage appears to be set for an outbreak of “gold fever.” I prefer to add to positions as the dips pass and my recommended stop sell point is just under the September 29 low (989.50 2nd London fix).
GLD (Gold ETF) – Daily (Source: StockCharts.com)
From the good news file at an American Association for Cancer Research conference in Houston yesterday, Bloomberg reported a Harvard Medical School study showed drinking coffee may reduce the risk of contracting the deadliest form of prostate cancer.
Conclusion:
The uptrend deserves the benefit of doubt until proven otherwise. If the SPX closes above 1113.68 I would raise recommended trailing stop sell orders on ETFs tied to the SPX to just under the November 20 low (1086.81) from just under the November 2 low of 1029.38. Once the trend reverses, I think some of the best shorts are likely to ETFs tied to small cap indices.
The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.
