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Market Sentiment At Its Lowest In 10 Months

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The State of the Trend

In this article I'll introduce a few charts that I regularly update on my blog, and piece them together to arrive at a conclusion about the state of the trend of the SP500.

Let's start with the weekly chart, and examine the trend that started in March of 2009. So far the SP500 has followed to a tee the 1994-2000 bull market rally (adjusted on a percentage basis).

Trends Analysis
Larger Image

Does that mean that the current rally will last until June 2014? Not so fast.

There's the End of QE2 looming on the horizon, not to mention all the political and fiscal uncertainties in Washington.

Are any of these reflected in the market? To find out, let's switch over to the daily chart with monthly pivots applied (a concept covered in my new book Trading the SP500).

The daily chart shows that indeed, some clouds are gathering on the horizon.

First of all, the index is trading below the open of the first day of the month; i.e., from a purely technical, short term point of view, the trend is down.

With monthly pivots applied, it turns out though that the SP500 bounced off precisely the first support level. Now, the way these monthly pivots work, support levels S1 and S2 are where you would expect the index to rebound should this turn out to be a fake out move. In candlespeak parlance, this is the normal level to which statistically the lower wick of a white body (where the close is higher than the open) monthly candle should extend. In other words, there is not enough evidence to suggest that the sky is falling, yet.

So now we know that if the rally is to continue, it should find support around 1320-1330. Plus the trendline connecting the 3.16 and 4.18 lows adds another useful visual parameter to monitor. If the SP500 manages to stay above these levels, the odds will favor a sideways/up market. A break below the 1320-1330 band will strongly suggest that the index may drop to the next support level, around 1285.

And to conclude, let's have a look at one of my favorite charts, the one with Hurst channels and the risk/reward oscillator:

No surprises here. The channels are extending sideways, the risk/reward ratio is neutral, and there's support at 1322 and 1312.

So what is the state of the trend? Flat, and the yellow light is on. And we know what levels must be crossed for the light to flash green or red.


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