4/19/2009 7:56:22 PM
The system is remains on a Preliminary Sell signal.
Last week I stuck my neck out saying that the close above 850 would turn out to be a false break, that clearly wasn't the case and now the guillotine is ready to drop as the market continues it's rise. That makes 6 straight up weeks in a row! Having said that, I'm keeping my neck stuck out and I remain firm that we're in the thick of resistance and a turn lower will begin soon.
We could get a little more strength this week but this rally, like a rubber band that gets stretched too far, is due for a snap back. I expect that by this time next week, we'll be lower.
If you're long on stocks and haven't reduced your holdings, this week looks like being a great one to begin scaling down.
On to the markets...
SPX Chart - Bigger Picture
6 up weeks in a row and over a 31% gain in that time, impressive!
We've now broken out of a downtrend channel that started over 6 months ago, so does that mean it's up, up and away from here? I don't think so, the 900 region is very stiff resistance and then there's the 40 WMA at around 970.
While all indicators for the bigger picture remain positive, this is still considered a rally in a downtrend and so opening new longs right now doesn't hold a lot appeal.
SPX Chart - Shorter Picture
Looking at the shorter term, it looks like we're getting extremely close to a reversal. We hit the upper band of resistance at 875 on Friday and we might get a new high to around 880 intra-day on Monday but after that I suspect we're heading lower.
Notice how the bearish wedge is getting squeezed at the top, combine this with overhead resistance and negative divergence on the MACD and it points to a high probability of a break lower very soon.
If Friday's high of 875 is it for now, then the Fibonacci 61.8% retracement becomes 746 on the SPX and this coincides with the November lows and potentially sets us up a larger head and shoulders bottom. How the market behaves in the next down cycle will be a key determinant for the longer-term picture.
For this week, support on the SPX is at 830 - 850 and resistance 875 - 900.
The VIX Picture
The VIX picture is showing is showing a steep downtrend that began at the end of March, it then broke support at 40 and as of Friday, even closed below 35. This indicates that fear in the markets is subsiding at a rapid rate, the next key level is 30.
An interesting point to note is that the 50 DMA is getting close to crossing the 200 DMA, which bodes well for the markets in the bigger picture. The shorter-term however, is becoming ripe for a snap back to the 40 region.
Watch for an up tick in the MACD for the start of this.
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.
The VIX Bigger Picture
I thought I'd show a bigger picture of the VIX to give you a little more perspective.
Looking at this chart, 30 is the next big support and so the strength in the markets can certainly hold up while the VIX goes through its cycle.
Now that the 37 - 38 region has broken, the VIX can easily go down to 30 (as can be seen from the horizontal lines) but once there, we then meet the longer-term uptrend line. This could mark a great shorting opportunity.
Summary of Position For April
On March 24 we suggested a half position in an Apr 930/940 Call Option and received a premium of $50 per spread. At that stage the market had blasted higher and we were anticipating a pull back. It didn't eventuate and so we let the Put Spread go.
The outcome of this equates to a net profit of $25 per $1,000 of capital utilized over the period, i.e. 2.5% before commissions for 4 weeks in the position. The official CBOE settlement price for the March SPX options was 870.59.
Current Performance for 2009:
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Quote of the Week:
The quote this week is from Henry Ford, "When everything seems to be going against you, remember that the airplane takes off against the wind, not with it."
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