Monday, August 9, 2010

1107 Revisited.

On July 28th Squiggly Lines discussed the importance of 1107 and 1115 on the SPX. It should not come as a surprise that Friday's 'employment sell off' found support at 1107.53 then rallied to produce yet another doji , which is indicative of the tug-of-war between the bulls and the bears at the current level. (I admit, I find 'reports' on the state of the economy mildly amusing--it is a great way to have a laugh first thing in the morning watching the brainiacs on CNBC)
The market is now entering the powerful Energy Date window of Aug 9th and 10th. Time is running out for the S&P to spike into the 1150-1155 area during this window--but there remains the possibility that the market may 'hang in' until the next Energy Date window of August 18-21st to make a important high at 1150-1155. (see Energy Dates on the left column). Perhaps a double top in the 1130-1135 area on Monday or Tuesday will be all the S&P will be able to muster before falling back.

Whether the S&P decides to peak at 1130 or 1150 is not really important. The 1107 area is SIGNIFICANTLY MORE IMPORTANT. (see July 28th posting for the discussion on 1107) If and when 1107 is taken out--especially on a closing basis--that event will serve as an important confirmation that some sort of an intermediate top has been formed. Then comes the critical part:

Assuming 1107 gets taken out, traders will have to monitor the market action closely to try to determine the nature of the decline. The August 4th comment discusses the Dow Theory warnings of the possibility of a resumption of the main trend being bullish. The anticipated decline will put this debate to rest. Will the market experience a normal correction in an ongoing uptrend OR will this anticipated decline be the start of the resumption of the recent downtrend AND resumption of the 2007-2008 massive decline? The structure: amplitude, time horizon and ferocity of the decline will offer clues as to the true nature of the market's status.
There are several indications that the next decline will be a resumption of the bear's rampage:
  • Complacency is becoming ubiquitous.
  • Technicals are becoming somewhat overbought. Remember, that the technical indicators do not have to become outrageously overbought like at the top of a major advance--like April 26, 2010. Momentum indicators and price oscillators merely have to approach over-bought status to indicate an impending reversal. This could be EXACTLY what is happening presently.
  • Volume on the upside has been anemic to say the least. This is typical of a bear market rally.
  • Many of the clowns in the financial press are frantically rationalizing why they are now buyers of the market and expect higher prices in the future. One almost has to feel sorry for these puppets--but nah...they serve such an important contrarian service that their absence would be sorely missed. KEEP TALKING TALKING HEADS. Keep that spineless acquiescence coming--the more the merrier.
  • The U.S. Dollar appears to be carving out a low of some kind. The bearishness on the USDX is almost palatable--a perfect environment for a vicious turn around that would put panic into the dollar bears minds.
  • Seasonality: Sell in August--enjoy the fall (autumn) and come back to clean up for the Christmas holidays. Libra and Scorpio are such satisfying signs to be a bear. Ursa scraps along the northern horizon at night during this period. The mood in Scorpio is so different than the bravado exhibited by 'Leo the Lion' in July and August.
Bottom Line: 1107 continues to be the magic number. Although it is early, there are strong signs that the Labour Day period and September 19-24th are going to be quite powerful for the markets.

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