Working Back to the Trend
We are expecting a weak day after the sell off of both European and Asian stocks. Nevertheless, it’s not the right time to go short. Rather, we expect dip buyers to snap up weakness here. If the pattern exhibited on the Nasdaq chart below repeats itself, we should get a small bounce first before prices continue back to the trendline.
Very Risky, But Momentum Still In Tact
The SPX’s 20-day average is back at $957, over 40 points lower than yesterday’s close. We ran back over the past two years and only found a couple of times when this index was able to extend above this average for a similar length of time.
The price is also extended above its 5-day average, so we are at a minimum expecting a pull back to $990ish near term.
There are a lot of bullish stocks out there so we probably will see buyers step in at the 5-day average. At some point over the next week to week and a half though we should get a bigger correction back to the 20-day average.
In other words, momentum appears to want to keep pushing higher, but the longer the SPX trades away from its 20-day average the higher the probabilities become for a sharper pullback so be careful out there.
It's All Up to the GDP
Yesterday we saw what looks like a topping signal. The put call ratio is at an extreme on the bullish side and we got an intraday reversal that looks like it could potentially be a shooting star; it would require a gap down and a negative day to confirm this.
This market has been one of the hardest markets to trade we have ever experienced. Going in to today there are so many unanswered questions (will it shrug off yesterday’s late day sell? will we get a shooting star? will prices pull back lightly and then whipsaw higher again? is a top in?) that we strongly recommend just taking to the sidelines.
We potentially saw bears capitulate yesterday. We need more evidence.
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Potential Spike Higher in the Works
Yesterday we posted that dips should offer a good buying opportunity. Prices over the past few days have been consolidating near the top of the range. This seems to indicate we will get a spike higher to capture a few bag holders before we get a more meaningful dip.
A pullback to the $950-$960 area should offer a good entry point for the next run up. Don’t be surprised, however, if we see a strong spike higher before we get such a pullback. Prices are too overbought to be chased, so don’t get sucked in if prices break higher here.
Buy the Dip, But First Wait for Revision to the Mean
When the S&P broke a two month consolidation zone to the upside last week it showed that bulls clearly remain in control of the tape and bearish arguments about why prices should be heading lower lost their luster; at least for the time being.
The break above resistance appears to be the real thing. It was confirmed by a breakout in the transports, volume was reasonable and price action pretty much speaks for itself.
From a purely technical standpoint this breakout means that dip buying offers the best risk:reward until something changes.
That said, prices are currently severely stretched to near term extremes. Overbought conditions can remain that way for some time, but if you take a look at the price history of the S&P over the past 6 months you can see that on a very short term basis the current price range is not a good place to buy.
Notice the current distance between price and the mean (the 10-, 20-, and 30-day averages). Currently the S&P would have to return to at least $950 just to tag the 10-day average. Probabilities and historical tendencies tell us to look for a dip from near current levels. That dip is likely going to offer a good buying opportunity given the fact that prices have broken above important resistance levels.
