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Friday, July 10, 2009


Consolidation at 879 Support

The next thing to watch for is either a decisive break of the June lows (the S&P 500 briefly dipped below 888 this morning -- the May 15 879 level is also support) or a breakout from the 927-930 resistance area. Given the VIX signals from last week and some other technical indications of a market shift, there's a good chance the next break will be down after this bounce is over.

However, strength early next week may provide a good selling opportunity, as "there are indications that a market shift is taking place..." A break of the June lows will confirm the Head & Shoulders topping pattern and likely mean more weakness is coming.

As expected, the market rebound from last week's selloff ended by early Tuesday, providing a good selling opportunity, and the market broke down quickly from there. The June lows at 888 broke down this week, confirming the Head & Shoulders topping pattern, which many in the media have now picked up on, and featuring the "bearish 13/34 EMA cross (red and blue lines)" that we mentioned last week. These two indicators have been fairly reliable sell signals for the intermediate term. However, we still have the bullish golden cross (purple line crossing above the gold line), which is a fairly reliable buy signal a little longer term.

Despite the breakdown, the May 15 low at 879 has continued to hold on a closing basis. That's 4 straight days now the SPX has closed between 879 and 882. If the powers that be can continue to defend this level, those who have shorted based on the now widely reported Head & Shoulders pattern may get squeezed. If it breaks down, though, we may see some significant selling.

Shorter term, there are some oversold readings and positive divergences that would normally indicate a bounce is likely. However, we've had several bounce attempts the last few days that have been very weak, and have worked off some of the oversold conditions (e.g., the VIX coming back down off its upper Bollinger Band). Whichever way the market breaks, the action could be strong after the narrow trading range late this week that has hugged the 200 day moving average (gold line).

Watch for a breakdown of this week's 869 low or a breakout above the 888 resistance level (former support at June lows, and also yesterday's high) for an indication of which way the next move will go. A close below 879 would also be a negative indication. Also, watch to see if the VIX can make a higher low and then a higher high to reverse the downtrend it's been in -- such a trend reversal would not bode well for the market. On the up side, a close over 888 would be positive, and a break of last week's low on the VIX would also be positive.

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