Thoughts for Tuesday, April 22, 2008...

I just wanted to share a few little items that continue to inspire my skepticism toward the ongoing rally in the S&P 500. The rally on Friday was certainly impressive. It certainly exceeded my prognostications of around 1382-4. At the same time, the underlying breadth and technical strength left me unconvinced of the bull argument.

If we look at the chart below, there are two technical indicators that fail to confirm the rally from the closing low on April 14 to the high on Friday, April 18. The first indicator the the Advance-Decline line. This indicator provides us with a glimpse at how many stocks are participating in any given market movement. We can see from this measurement that even though the S&P 500 rallied to a new short-term high, the breadth of the rally deteriorated significantly. This suggests that the price movement is losing strength.

Our second indicator of concern is the Relative Strength Indicator. I tend to look at this indicator using both a 10-day and a 14-day time period. The version displayed below is the 10-day RSI. This shows a similar situation to the Advance-Decline line. The S&P 500 rallied to new highs, but the indicator failed to confirm this movment. The difference is that the Advance-Decline line measures the breadth of a movement, while the RSI measures the rate of change of a price movement.

I would also like to note the price movement of the S&P 500 since the March 17 closing low. We saw this index rally up to April 7 before beginning any sort of meaningful pull-back. If we draw a line across the closing lows of that March 17 to April 7 rally we can see an interesting level of support/ resistance. The decline from April 7 broke down below this support level before bottoming out on April 14 and rallying into Friday. What I find interesting is the way that the S&P 500 rallied back up to this same trend-line before stalling out on Friday. It remains to be seen if there will be another test of this resistance. We may well see a rally up to the trend-line extending down from the highs of October 31 and December 10, which might also include a test of 1400.

Who knows what will happen next? The S&P 500 may indeed push higher and perhaps even test the 1400 level. What we do know for certain is that more than one perspective suggests that the strength of the recent rally has waned. Any further upside movement should be viewed with suspicion and as an opportunity to take short-term profits.

I am not the kind of analyst who claims to be correct all of the time. I have found that my observations tend to be legitimate, but that the market sometime finds it own ways of playing them out. I spoke a last week about the similar wave length in all of the upward thrusts on the S&P 500 since March 17. My argument was that a rallly from that point would put us up near the 50% retracement level of the decline from October 2007. This did not happen.

This week I became significantly more bearish when three technical indicators made bearish cross-overs. This occurence was followed promptly by a sharp rally in the equity markets. I cannot say that the rally to this point changed my overall bearishness. Of the three technical indicators that I shared this week, the DMI is the only one to turn positive. We did break back above the 10-day and 50-day moving averages. The big question now is whether or not the S&P500 can hold above them. We usually see a reversal down within four days of such a breakout, if one is going to happen.

When I feel myself being kind of whipsawed around by market action, I like to step back a little bit and see what might be correct and needs to be abandoned. I could not help but notice that the closing low on the S&P 500 this week was 1328.32. If we see the 54 point rally that we discussed last week take shape from the Monday close, then that would put us above 1382. Interstingly enough a 38% retraceement of the decline from the October highs rise to around 1384.83. So, it could be that we see a final shot up to the 1284 area before we begin the bearish movement suggested by the technical oscillators.

We will just have to wait and see how things play out.

Eldinril

Thoughts for Monday, April 14...

Last week, I spent some time outlining a possible bullish blowoff to the 1420 level. That pattern never developed, and since that time we have seen enough technical deterioration that I feel it is worth mentioning. The chart below provides a few of the occurences that prompt me to view the market from a bearish perspective at this point.

The first thing I would like to point out are the technical indicators at the top of the chart. If we look at them from top-to-bottom, they are the Stochastics Oscillator, Wilder's Directional Movement Index, and the Moving Average Convergence Divergence Indicator. We can see that all three of these technicals indicators experienced a bearish crossover in the last two days. These crossovers are given even more meaning by the fact that the same oscillators on the weekly chart remain bearish. This suggests to me that a downward trend has developed on the S&P 500.

We can also look at the waves formed since the closing high set on April 7 at 1372.45. Since that time we have seen a trend of higher highs and higher lows yield a lower high followed by a lower low. These progressively lower levels suggest that some sort of downward trend has developed.

We have also seen a breakout above the 50-day simple moving average retest and breakdown through the 50-day moving average support. That same trend-line also moved lower for the first time since March 18. I view these two developments as bearish in nature, as well.

My personal repsonse to this situation was to initiate a short position on the S&P 500.

Thoughts for Tuesday, April 8, 2008...

I just wanted to share another quick thought about the recent rally on the S&P 500. The chart below is not the clearest explanation that I have ever made, but I think it gets across the general idea. If we look at a closing price chart of the S&P 500 since the closing low of March 17, we will see that this index has made three upward thrusts.

The first thrust took place on March 18, and assumed a length of 54.14 points. The second thrust began with the closing low set on March 19 and extended up to the high set on March 25. This thrust assumed a length of 54.57 points. Our third thrust high took place between March 28 and April 1. The length of this wave was 54.96 points. You might have noticed that this gives us three thrusts higher that have each assumed a length of roughly 54 points.

Just for the sake of speculation, let us assume that we begin a fourth thrust up from today's close, which was at 1365.54. If we were to use the median length of the three thrusts and assume that our final thrust will assume a roughly equal length, that would suggest that the S&P 500 might make one more thrust higher to 1420.11. As this chart also points out, that would run the S&P 500 up to a level just above the 200-day exponential moving average. It would also put us at an interesting level from the perspective of Fibonacci analysis.

If we back up for a moment and look at the decline down from the closing high set on October 9, 2007, then we can see that the S&P 500 declined 291.79 points to a closing low of 1273.37 on March 10. A fifty percent retracement of this decline would rally the S&P 500 to around 1419.26. That would put us in the same neghborhood as the thrust suggested by our first chart.

I have mentioned that I am not terribly impressed by the rally we have seen since March 10. At the same time, the markets have traded rather flat over the last few days, and I tend to agree with the old adage "never short a dull market." I have little doubt that a dramatic thrust up to 1420 over a short period of time would cause a great deal of excitement. Nevertheless, I would view that level as an excellent point for a reversal from more than one perspective of the Elliott Wave Principle.

Thoughts for April 6, 2008...

There is a great deal of speculation over whether this market has yet reached bottom. I would say that we have reached "a" bottom, but we have not reached "the" bottom. Some of the reason for my thinking can be found in the chart below.

If we look at the most recent lows, we can see that the S&P 500 made a closing low for the week of March 14 that was 2.8% below the closing low for the week of January 18. At the points in time, the 14-period RSI of this index reached an equal low. Some people might call this a bullish divergence. I do not find it to be a particulary inspiring one. In fact, I find myself wondering if the closing low set on March 14 was simply "Wave b" of an expanded flat formation. It suggests to me that further downside may lie ahead.

If we look back at the closing highs of December 15, 2006 and February 16, 2007, then we can see a far more dramatic RSI divergence. The subsequent sell-off lead to a great deal of angst, but did not mark the end of the bullish formation. The peaks that formed between the highs of July 14 and October 12 were far more pronounced, and came with a definite deterioration in the overall relative strength of the S&P500.

Such RSI divergences are not necessary for us to reach a bottom in this recent bear market. Nevertheless, this is but one reason why I am not terribly enthused by the recent rally in the equity markets. There simply remain a great deal of relative weakness in the markets. I will admit to buying some financials and industrials for long-term investments on the weakness in March, though I am not concerned if those particular actions result in short-term losses.