Today, we are about to hit our first level we called for on Sunday on the S&P 500 1235. We have remained bullish over the last ten weeks; however that doesn't mean we have sat back ideally 100% allocated to equities, riding the S&P back and forth within the 100 point congestion zone. We remain bullish as the market passed an important test last Friday by settling well above 1204.00 (1219.00 to be exact). 1204.00 represented the upper region of our congestion zone (1114.00 - 1204.00) which captured 90 percent of price action for the last eleven weeks. Regardless of the upside break- out, for the last eight trading days, we have identified key resistance between 1235.00- 1255.00 (combination of the green Moving Average Line and the blue horizontal resistance line which we have had in place for several months). See Chart below of the S&P. This region is currently posing the next big challenge for a market which has had to consistently deal with poor fundamental news. Thus far, as it is playing out, day to day, the Index hit a high of 1230.00 (just under initial resistance of 1235.00) on Tuesday, and has since come under pressure the last two trading days.
For our readers, we suggested on previous rallies to reduce risk at the upper range of 1186 to 1204. If you have been reading our free research you took action and bought the S&P 500 at 1090 when we hit the intraday low of 1074 on Oct 4th.
So where is the market headed?
Nothing has fundamentally changed in the last 11 weeks. Companies started to report earnings two weeks ago, which 70% of the S&P companies that have reported, beat earnings. We believe this rally is purely constructed based on human behavior - behavioral finance. You can see from the chart above of the nature progression of human behavior in the markets. You have a cycle lead by optimism, excitement, relief, anxiety, denial, panic, maximum amount of pain and lastly optimism.
These human behaviors are purely based on primal survival instincts. Our theory is we are approaching the optimism phase with a potential EU resolution, which will be followed by excitement. We believe the optimism phase will get us to the 1245 to 1255 level on the S&P 500. Then we will have the excitement phase getting us to the 1300 level, which we would be sellers. Remember, fundamentally nothing has really changed. The globally economy is still deleveraging and is 3 years into this process, which historically, this process can last 10 years.
Now we are technicians first and believe human behaviors leads to price action and ultimately price discovery. However, we do overlay Macro trends when considering trade or investment ideas. For long term investors, look for the 1255 region to take a little off the table and 1300 to raise more cash. For the short term trade we would be buyers to the 50 Day Moving Average of 1179 to get long into a longer trader for a yearend rally.
If our theory is correct, you want to tactically position your portfolio with growth sector, Basic Materials, Services, Technology, Industrial goods and Energy. Some examples of individual equities for these sectors are as follows.
For those longer term investors looking to reposition your portfolio for a year-end rally read here. http://www.thechartlab.com/year-end%20rally.php