In spite of many bad news stories that would have normally sent the markets into a tail spin last Wednesday, the US markets displayed resilience and moved up with a four day rally. US residential real estate prices continue to fall, US consumer spending continues to contract, and the inflationary impact of rising oil prices weighs heavily on the decision for the US Federal Reserve to continue cutting interest rates.
Looking at the daily S&P 500 chart above, we can clearly see that the market continues to trade in a primary down trend, as defined by a declining 50 period and 200 period SMA. With the continuing bad news but a contradictory price rally, the question begs to be asked: What now?
Two weeks ago we presented a live market briefing via the internet, outlining two potential scenarios. The two scenarios are based on the premise that we are still in a down trend. See below.
Scenario 1: During the months of January and February the S&P 500 traced out a symmetrical triangle. Traditional technical analysis states that a break and close outside of this triangle, followed by confirmation the following day, constitutes a break out and should be traded in the direction of the break. As it panned, out the S&P 500 did break to the downside, but on a daily chart it closed back into the triangle, hence negating any breakdown (anticipated based on the last bar of the chart). At this point Scenario 1 is invalid.
Scenario 2 forecasted a break upward, outside the top of the Triangle but finding major resistance just above the current market level. If it does, the market has some major levels of resistance to get through before it can continue higher. There are four resistance points we can identify, which become potential failure points for the markets. The first level of resistance is the declining 50 period moving average (blue declining line). Markets can often be observed to trade slightly above this average before continuing their downward trend. The next level of resistance is taken from the previous swing high. (Pink horizontal line). The third level of resistance is the old support line in November (dark blue heavy line) which now becomes resistance. The last level of resistance is 50% of the price range A-B (in Aqua). Three of these resistance lines come together in the red box. This is a point of potential price failure in the market.
Summary: The market is in a primary downtrend. If you trade against this trend (go long) you can only do so in very short time frames (1-3 days). Otherwise stick with selecting trades within the primary trend (Buy puts). Any upward movements should be taken as counter trends for the next move down.
Before we can place any importance in statements that the markets have bottomed, we need to observe an upward 50 SMA and 200 SMA which are both a long way from pointing upward. This will be preceded by a well defined basing structure, of which there is no evidence either.
Kind Regards,
Paul Wise.