That’d be a breakout

September 10, 20128 Comments

The S&P broke the resistance point of just over 1420 last week. It’s looking like it passes my “3-day” rule for breakouts – that is, a security that breaks though an old level of resistance or support should be given 3 days to hold to reduce the potential for a false breakout. Thus, we might just see 1500 yet. However, I still believe that the market direction is largely going to be carried by the Fed action this month (there is a meeting this Thursday where something may or may not be said…). An extension of low interest rates is pretty much in the cards, and I don’t think anyone will be too inspired if Bernanke suggests such an extension. However, a bond-buyback or similar “QE” program could push the market up to that final 1500 resistance level I’ve mentioned in numerous posts. Conversely, if no real direction is provided by the Fed, there may be a selloff. The 1420 level may not hold in such a case.

Truthfully, this is one of those times when it’s pretty hard to give firm guidance for near-term market direction. Seasonality is often bearish at this time of the year, and markets may be getting a bit overbought (note RSI and stochastics on chart above). Trailing PE ratio for the S&P (I only look at trailing data—forward earnings are a guess) are slightly above historic averages (16.5 current vs. 15.5 long term mean average).  But the Fed can cause the markets to disregard reality.

I continue to hold over 30% cash in my equity model. I am not bearish enough to hedge (via inverse, shorting or VIX strategies) but not bullish enough to be fully invested either. As mentioned in last Monday’s report, it’s a bit of a mugs game right now. Better to play a cautious hand in light of the conflicting evidence for markets, in my opinion.

8 Comments

  • PEAK PERIOD OF SEASONAL WEAKNESS FOR THE S&P 500 INDEX: SEPTEMBER 16 TO OCTOBER 9 (EQUITY CLOCK.COM).

    US DOLLAR INDEX BROKE AN IMPORTANT LEVEL OF SUPPORT AT 81 ON FRIDAY AND IS OVERSOLD (THE MOST OVERSOLD SINCE MAY 2011). SOME KEY LONG-TERM LEVELS OF RESISTANCE ARE CLOSE AT HAND: (S&P CAME CLOSE TO 1440 ON FRIDAY). AS WELL, S&P 100 LONG TERM TRENDLINE RESISTANCE REMAINS APPARENT ON THE CHART OF THE S&P 100 (660), WHICH COULD RESTRICT A BREAKOUT. VIX IS ALSO TESTING LONG-TERM SUPPORT AND THE PUT/CALL RATIO ENDED BULLISH AT 0.74 (COMPLACENCY). ARE WE IN FOR A BOUNCE OF US CURRENCY AND A MOVE OF THE S&P INDEX TO THE SUPPORT AREA OF 1390?

    Reply
    • Jean-pierre–thanks for the question about the USD–in fact, I think it has inspired me to cover that topic on Fridays blog (recall that I am now doing 2 blogs/week–Monday broad view, Friday sectors of interest).
      Something that I have watched for quite some time is a huge symetrical triangle for the USD–it recently hit the top of the triangle, and is now heading down–I’ll post this later in the week showing the chart–but if you are interested, go to stockcharts.com and look at the USD since 2006–you will see the triangle. There could be an oversold bounce shortly, as you state. But the bigger picture is a little more bearish.
      And thanks for the observations regarding VIX and sentiment. Regarding the VIX, I was just reading Jason Goepfert’s comment on his daily sentimentrader.com newsletter, and he pointed out that a bounce like the other day’s 10% move on the VIX following a prior day’s new high’s on the S&P is not a consistant enough signal for the bears to expect a selloff.
      So, again, I wait the Fed. Our normally reliable technical indicators may take a back seat to what Ben says this week.

      Reply
  • Richard,

    I`m new to investing and still trying to grasp the whole technical approach, Do you discuss
    RSI and stochastics on charts in any of your books ?

    Thanks,
    Marcin

    Reply
    • Yes, I discuss these and other momentum indicators in my book “Sideways”–I wrote the book for people like yourself–new to T.A.–thus, I presented it in plain language. Hope it helps.

      Reply
  • For your Friday article on USD, please include a couple elements:
    1) your thoughts on where the Cdn$ could go over the days, weeks and maybe till YE
    2) if the USD is oversold and could bounce back, what invetment vehicle might be the best for a Cnd investor to utilize a play?

    Also a Friday article on Natural gas is always a welcome read for me.
    Thanks

    Reply
  • So much for the sentiment readings. September looks to be a strong month on the back of more Fed QE

    Reply

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