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Wednesday, June 02, 2010


Summer Rally?

Today, the market action at the SPX 1090 resistance area was significant. Instead of selling off hard from there, as it did yesterday, this time the market rallied right through this resistance area, closing over 1098.

The next test will be the 200-day moving average at around 1105. There's also an inverse head & shoulders pattern on the hourly SPX chart, which will get a confirmed breakout over 1105.

If the SPX can get through 1105, the market could be in for a nice rally. The VIX, bonds, and the the Put/Call ratio all look like they could drop quite a bit in a more stabilized stock market environment, as long as the news flow gets less negative.

Below is the QQQQ chart we posted last month in our warning to switch from stocks to gold. Now, with some follow-through rallying tomorrow, we could be exiting an unstable stock market period and entering a more stable period again.

Notice that MACD got a bullish crossover in February at the beginning of the stable February-April period. Now, an up day tomorrow would confirm another bullish MACD crossover, and would also move QQQQ over its 20-day EMA. You can see from the chart that using above/below the 20-day EMA as a guide to favoring the long/short side has worked well.

Here's a similar chart for the $VIX, which normally moves in the opposite direction of the stock market:

The $VIX looks like it's broken its uptrend and had a bearish crossover on MACD. If the VIX continues to drop, the market should be much more stable.

Here's one for TLT, the ETF for 20-year bonds:

Bonds, which have rallied during this unstable period because of their "safe haven" status, also could be breaking their uptrend and also have had a bearish MACD crossover.

And here's one for the Put/Call Ratio:

The Put/Call Ratio is also coming down from an extreme level. Selling panics feature increased put buying, whereas market stability features more balanced put and call buying.

There are lots of people calling for a market crash coming any day now, and they may be right, but these indicators are pointing to market stability instead if we get some follow-through strength in coming days, especially tomorrow, and especially over 1105 SPX. An up day tomorrow would also be the first time we'd see 2 consecutive up days since April, which would be another sign of renewed stability. On the other hand, another break of the 1090 support area probably means more selling is ahead before the market stabilizes.

If we do see a summer rally, that would keep the SPX above its 12-month EMA (if it lasts until at east the end of June) and keep this cyclical bull market going for at least a little while. This chart shows that the 12-month EMA has done a pretty good job of identifying the trend over the last 10 years:

It's still a dangerous market, but if we do see some follow-through strength tomorrow, it should become a lot less dangerous for a while. We believe any summer rally would be a selling/shorting opportunity, but if it happens, you won't want to short too soon.

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