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Where is the market heading now? Down?

That’s a million dollar question investors are probably asking now. I am asking as well. The truth is that last week move upward was impressive. They say, it was the best 5 day move since 1928 (I think). But was this move a bullish reversal or is this a bearish correction? I think, now is the time when this question will be answered.

In my last post I wrote that I was expecting the market correcting from its downtrend back up to somewhere around 1320-ish level (50 day SMA) or up to 1340 – 1360-ish level (major resistance level) and there we would see what would happen next. So what happened last week?

 

$SPX
Click to enlarge

 

The red horizontal line represents the 50 day SMA resistance level where I expected the market to stall and then bounce back down (see other diagonal line tagged with #1 round tag). It didn’t happen and the market blasted on Friday way up. However, I think it was overreacted optimism over the European, mainly the Greek debt settlement as I will try to explain later.

The stock market represented by S&P 500 ($SPX) blasted up thru 50 day SMA and moved higher and ran up to the major resistance level. Right now the market stopped. When you look at volume, it was declining through the entire upward move. That may mean that this rally is actually exhausted. It may mean nothing, of course. If the market blasts through this major resistance level on high volume, we may call this as a new bull trend.

However, I am not much convinced about it and therefore I am slightly bearish.

Since my charting program doesn’t show volume for $SPX I use SPY chart to check the volume (as well as price action sometimes), since SPY tracks $SPX. But you can also review Dow Jones and you will see the same result.

 

SPY
Click to enlarge

 

Also when you check the Friday’s action, the market wasn’t able to move through this resistance line (green line above Friday’s high on SPY chart above). It will probably be bouncing there and be a bit choppy a couple of days.

Why do I think the market will most likely go down?

  • The upward move was too fast (greed), people chasing the trend, under-invested mutual funds, etc.
  • Traders overreacting the settlement news in Greece, but this problem wasn’t solved and will come back. See what happened today with Moody’s downgrading Portugal, but next there is Italy and believe me, the Greece problem will come back.
  • There is no significant inhibitor to move the market back up (economic data are still sluggish, earnings will come not earlier than next month, etc).
  • There is a plenty of investors who entered the market at the very high and now they will get an opportunity to get out break even, many will take that chance.
  • StochasticRSI indicator indicates the market in overbought range.
  • And lastly, look at $VIX action, the $VIX is once again showing increasing nervousness on the market (Bollinger bands are widening = momentum is speeding up, $VIX is rising in price to higher levels = more panic is returning to the market; well it is still at low levels, but rising; see the chart below).
  • Because of the fast and huge movement up, the correction of this move is imminent.

 

$VIX
Click to enlarge

 

The crosses indicate the highest and the lowest volatility (or nervousness) on the market. Given all the aspects above I am expecting the market correcting back down (see the arrow on VIX chart as the volatility starts rising). Of course, this may not happen. Tomorrow or on Friday, everything may be different. The market may get some new impulse and it may continue up. However, I am not 100% convinced that this is the case.

There are now a few scenarios.

  1. The market will go choppy or down to 50 day SMA. It bounces back up and continue upwards, break thru the 1360 resistance on high volume and we will have a new bull trend.
  2. The market will go down and correct to 1300 level, bounce back and similar continuation will occur as described above.
  3. The market will break down through the 1300 support and will continue down to 1260 level.
  4. If 1260 level will be broken, we may expect a nasty decline.

These days we will have a chance to see where the market will go. From longer perspective the market is in sideway trend. If for example the second alternative happens, this would be a new bullish trend establishment (the trend will be creating new higher lows and new higher highs) and it will be the time to reverse my attitude and become more bullish. Lets see what will happen.

Happy trading





4 responses to “Where is the market heading now? Down?”

  1. Ivan says:

    Very interesting stock market insight!

  2. Lauren says:

    Thanks for sharing

  3. Andy says:

    Looks like we are heading down again. Stocks on a rollecoaster, heh?

  4. Babe says:

    Stock Trading…

    […]Where is the market heading now? Down? | Hello Suckers …[…]…

  5. Tom says:

    Major resistance dead ahead – if we take this out it could be big

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