The TV pundits all contribute their fair share to the conditioning process by clouding thoughts of any market player. To the extent that all ambiguities presented will bait investors to thinking IRRATIONALLY! Like, waiting for a 1000 point rally to emerge once the fiscal cliff is resolved.
Fortunately, underneath all the headlines a visual and graphical interpretation can be mathematically extracted. It is here, in these very charts, where you will find an answer that illustrates what is really going on, so that us technicians can observe, scrutinize, and formulate a particular bias.
The information provided does not tell you why, or when, but what!
In this case, ‘the what’ is a bear market rally. These particular rallies are very sneaky and most convincing, but can be properly identified when using the right tools.
For starters, a basket of heavily weighted companies, ‘THE NIFTY FIFTYs,’ which offer the bulk in the performance in the averages -all now have chart patterns that cannot sustain the continuation of this advance. Invariably, when volume remains light during an extended window of time, the result is an inevitable sharp collapse back downward to the previous lows or worse, new lows that can no longer support a bull market.
The S&P 500 index is a case in point, which is still in rally mode, and perhaps can continue higher if there is further consolidation. But if only mother market is ever so accommodative to our own expectations.
And it is because of her complexities that make it an impossible arena for perfection. The current rally back is clearly overworking itself to recapture the previous drop in November and rather than guessing where exactly it will end, think of it in terms of direction. The future course of these violent counter trends ultimately end in a scare plunge; and all the pumping in the world cannot uphold the violent cascade of selling pressure that will implode on the masses.
Consider the technical chart below, which projects a disaster waiting to happen, and with only a small chance of one last leg higher before this rally is all said and done.
S&P 500 – Daily Chart
While things are never easy, the (quote-unquote) obvious trade in the major indexes has now played out, especially on the S&P 500. Of course most of it happened in an overnight gap up, but that has been par for the course. From here things get more complicated. Here are a few ways to look at the roadmap utilizing the S&P 500.
First the original S&P 500 chart that has been in play for months, looking at the June-Sep run, and pullback since. Two key points here – the index has bounced from the 61.8% retrace to nearly the original 38.2% retrace at ~1395. That number is also key in that it was support multiple times in August 2012. Support turns into resistance and vice versa so this 1395 level is a very obvious level to watch.
Second, is the chart I posted yesterday morning which is simply the same Fibonacci levels but focused solely on the September-November pullback. What’s the first number that sticks out? 1394 (call it 1395, close enough for government work). That is the 38.2% retrace of the two month correction.
If 1395 is vanquished, the next two levels are 1409 to 1424 which you can see was an area with a lot of traffic in late October to early November before the correction became much more ferocious. That second number also coincides with a falling 50 day moving average.
Last, on a very short term frame there is a potential for an inverse head and shoulders formation (which favors bulls) in the near term. The head being Thursday/Friday’s lows and the neckline being about “here” at 1390. If that does play out, it measures to a target of ~1430. That would be a 3% move from here.. and still not create a new higher high versus those early November levels. Hence all that could in theory happen and still bode poorly afterwards. But either way, one can see all the congestion and push pull in the areas overhead.
Of course all this coincides with positive seasonality, the constant negotiations re: the fiscal cliff, the next round of easing to be announced at December’s FOMC meeting (to replace Operation Twist), and a slowing corporate earnings outlook.
Anyhow enjoy the Thanksgiving holiday and we’ll catch you on the other side.