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January 11, 2009

Weekly Update
by Angelo Campione

1/11/2009 8:09:39 PM

Welcome to the Advantage Report, this report summarizes the general market as well as the Nasdaq 100 and issues BUY or SELL signals when the conditions present themselves.

General Commentary:

Both the SPX and NDX remain on a full BUY signal.

We had a pull back to support this past week and now we get to test out the resolve of the markets. The markets have been holding up relatively well in the face of some not so pleasant data and this is a positive sign for now.

We're in options expiry week now and so anything is possible, an advance from here would not out of the question. Having said that, any advance that we do get is unlikely to be sustainable, as the internals are starting to look tired for the short term. The medium term picture remains positive but we could be in for some more range bound action before a decent rally gets underway.

As a side note, I saw a stat during the week that put 2008 into perspective, it said that for 2008 we had 18 days where the S&P had a daily range of greater than 5% and between 1956 and 2007 there were 17 days. You could say we got over 2 generations of volatility all in one year!

On to the markets..

Bigger Picture

While the week finished on a downer, the V bottom for the medium term is still maintaining its integrity. As long as the 850 level holds, we remain on track for a rally to the 200 DMA at around 1160.

Note also that the MACD remains positive (circled area).

Smaller Picture

In the shorter term, last week turned out to be a consolidating week of the big move in the prior week. This is not a bad thing as it adds to the stability of the trend (as long as the trend does in fact hold). We are now testing the 50 DMA support point and as long as the 880 region can hold, we should see another push higher, beyond 950 possibly by the end of the week.

The scenario discussed last week about a push to 1000 before coming back to test 920, seems to have changed for now. We now seem to have some negative divergence developing on the MACD histogram and also in terms of cycles, we are getting to a point where a reversal is close. Having said that, it doesn't mean that we're necessarily heading south, it just means the upside seems limited in the short term.

A possible scenario is that we find support at 880 on Monday and head for 970 into options expiry and then go sideways between 850 and 950 for several weeks before the advance begins. This would be consistent with our bigger picture view discussed above.

For next week, support on the SPX is 880 - 850 and resistance is 950 - 1000.

The VIX Picture

The VIX held its ground last week and advanced, supporting the downward move in the markets. We now have a cross in the MACD as well as positive divergence on the MACD histogram, this suggests there's more negativity ahead for the markets.

Looking forward, if the 45 - 50 region can contain the current upward move, then the downside in the markets shouldn't be too severe.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place.

NDX Chart - Shorter Picture

The Nasdaq is also displaying bearish tones, there seems to be a bearish wedge developing as well as some negative divergence on the MACD histogram.

If support around 1190 - 1200 breaks, then the potential for a new down leg exists, although support between 1100 and 1150 is quite strong also.

For next week, support on the NDX is around 1200 and resistance is 1300.

Quote of the Week:

The quote this week is from Euripides, a playwright from Ancient Greece, "Events will take their course, it is no good of being angry at them; he is happiest who wisely turns them to the best account."

Feel free to email me at angelo@stockbarometer.com with any questions or comments.

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Regards,

Regards,

Angelo Campione

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