4/26/2009 8:41:48 PM
The system remains on a Neutral signal. (Note, For this service the word "neutral" seems to work better than the word "preliminary").
On the one hand the market did well to finish near its high for the week as it shows strength, but on the other hand dark clouds are building as the underlying indicators are showing that weakness is coming.
Last week I said that I expected the market to be lower by this time. It is lower, but only by 3 points! The markets don't make it easy to second guess them and love to do what isn't expected. When we got the big downer on Monday, it looked like the party was going to be over, but no, it continues, and now it's feeling like a round of musical chairs where the music gets louder to distract you from the fact that the chairs are being taken away.
Yes, the short-term trend is still pointing up, however we're looking for that to break in the not too distant future.
On to the markets...
The 6 straight up weeks are over (even if it's just by the smallest of margins), the market went down intra-week and finished roughly where it opened. In candlestick charting, the candle this week is called a "hanging man". The hanging man is a bearish reversal pattern that can mark a top or resistance level. The key to this signal is confirmation in the form of follow through downward movement in the week ahead.
Judging by the RSI, there's a good chance that we will see some follow through.
The shorter picture is quite interesting, Monday gave us the break down from the bearish wedge pattern but Tuesday found support at the 825 level and proceeded to rise from there, with Friday putting in a decent rise that takes us back towards resistance.
Last week I said to watch for the black line on the MACD to cross the red line for the likely start of the down leg, we've got that now, but it can still vacillate around this level. At this point the negative divergence on the MACD histogram is screaming a warning sign, any weakness this week is likely to give us a clear sell signal. Watch for a break of 825 to put an end to current rally.
I'm still looking for a retracement to around 750 over the next few weeks.
For this week, support on the SPX is 830 - 850 and resistance is 870 - 900.
The VIX Picture
The VIX chart shows the downtrend that started from early March, which inversely coincides with the rise in the markets, as you'd expect. The interesting thing is that even though the market finished strongly at the end of the week, the VIX has given an indecisive signal.
This suggests that that the participants are beginning to get suspicious about the strength in the market and are poised to get fearful quickly if necessary. The MACD is showing how the jury is still out on whether the reversal is imminent. The week ahead may resolve the indecision.
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 current position from April 21 is a half position in an SPX May 695/685 Put Option Spread for a net credit of $0.40 and on Apr 22, a full position in an SPX May 960/970 Call Option Spread for a net credit of $0.40.
The premium received if you entered these trades is $60 per $1,000 of margin required per spread (before commissions).
In relation to the current open positions, with 3 weeks to expiry we remain comfortable.
Current Performance for 2009:
January - 6.0%
February - 8.0%
March - 4.0%
April - 2.5%
(Please note, this performance is raw, i.e. without brokerage/commissions taken into account)
Quote of the Week:
The quote this week is from Alexandre Dumas, "Do not value money for any more nor any less than its worth; it is a good servant but a bad master."
Feel free to email me at email@example.com with any questions or comments.