Wednesday, June 9, 2010

S&P Moving Forward

Are we looking at a bottom or the start of something worse?

In this analysis I again returned to the primary comparison between the S&P and its relative position to 20-day, 50-day and 200-day MAs. In February I concluded:

However, all trading ranges eventually gave way to rallies. So, is current market behaviour simply a pause in a longer advance? Has the counter rally done enough to instill belief the economy is recovering? The answer would appear to be 'Yes' - although those in Europe might not feel it.

In May I took a look at the short term picture and concluded then
So far, Monday's reaction to Friday's close is stronger than both average and median behaviour in the past. The likelihood here is that we will see a return back to Friday's closing level within the next ten days. At that point the dust will have settled somewhat and we will have a better idea as to the roadmap ahead.

Given this - shorts may have the most to play for off today's gains.

Now the S&P is trading below its 200-day MA it's time to take another look. On Tuesday the S&P finished 4.1% below its 200-day MA, 7.7% below its 50-day MA and 3.5% below its 20-day MA.

Since 1955 there were 22 matching periods where the S&P was between 3.9% and 4.3% below its 200-day MA and at least 1% below both 50-day MA and 20-day MAs. These included August 2004, October 2000, September 1998, May 1994, April 1994, March 1990, February 1990, February 1984, December 1978, November 1971, June 1969, February 1968, June 1965, September 1960, July 1960, January 1960, October 1956, and June 1953; 1960, had the most matches for one year at 4.

In 1960 the first match did not prove to be the decisive one, but later ones were close to tradable bottoms - and in each case there was a bounce of at least one-day in duration.

Looking at the relative performance of the S&P over the following 10 days showed a net bullish bias; error bars mark 95% confidence intervals. Stop placement could go 0.5% below yesterday's close which should give a long trade sufficient room to maneuver higher.

Adding to the bullishness were earlier matches offered long-side opportunities of at least a year in 2004, 1998, 1994, 1978, 1971, 1968, 1965 (?), 1960 and 1953.  The real stonker was the October 2000 match which was the start of the secular bear market - but that is not the situation we are in now.

So while markets may push to new lows it's unlikely the current down trend has more than a month to run. A tradable bottom is likely to present itself if not now, then inside the next few weeks. At that point markets may build a trading range governed by net accumulation (greater volume to the upside than downside) which will set the platform for the next step of the rally.

For shorts holding positions from May it may be time to cover.

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