SMT released long buy signals for DIA, SPY and QQQQ on June 24, 2008. Since mid-May, the market indexes have declined about 10%. On Tuesday, the S&P index made an outside reversal day, which could very well be the spark needed to ignite a rally back to the 50-dma (day moving average). Overall, we continue to be long-term bearish on the market indexes.
As shown on the chart below, the S&P index is very oversold. Key indicators, such as the RSI (relative strength index) and the MACD (moving average convergence/divergence) are at levels that indicate the stock is poised for at least a short-term bearish rally. If SPX can bounce back to around 1330, that would equate to about a 4% increase in stock price. If the stock bounces in price, it will soon encounter the down-curling 50-dma, which will probably serve as resistance. If we get the long-awaited bounce, we will look for a price to short the market indexes. We have to remember that any rally attempt is only to be considered a bearish rally or a corrective phase rally that is temporarily counter-trending the main downward trend, and will come to exhaustion in the weeks ahead.
In summary, we believe the S&P will bounce in price from current levels. The 50-dma will probably serve as resistance. If for some chance that level is exceeded, then two other significant levels of resistance are not far away (i.e., the downtrend since October '07 and the 200-dma). We strongly believe any rally attempt will come to a scretching hault at one of these levels of resistance. In our opinion, the current charting pattern will perform much like the rally in late-Nov/early-Dec '07 (i.e., a bounce followed by a massive collapse in price).
S&P 500 Large Cap Index ($SPX), Two-Year Chart
In addition to the market being highly oversold, the days surrounding the Independence Day Holiday (see chart below) are normally positive days as well, which could contribute to this much anticipated bearish rally. I say bearish rally, because it is highly likely that any rally attempt will be short-lived, then the selling pressure will resume.
Performance Surrounding Independence Day ($SPX), Ten-Day Bar Chart
Another interesting chart is a historical seasonality chart of July. What it implies is that the market could do well for the few days days of July (before and after July 4th), then sell off, then renewed buying late in the 3rd and throughout the 4th weeks of July. If this is the case, then the charting pattern could look much like the trading history from about mid-January through the end of Febuary 2008. After that comes the major selloff to the bottom of the bear market. This is all speculative, but could very well happen.
Seasonality Chart ($SPX), Month of July Chart
We still believe the October 2007 high was a significant top of historical significance, and the market indexes may not reach a bottom until late 2008. From the S&P's 2002 bottom to its 2007 top, it found support at its 38.2% retracement line (see chart below). That's a logical support point for a short- to intermediate-term correction. However, the stock market normally declines in five waves during bear markets. In Elliott Wave work, that usually suggests the possibility of another major downleg after any short-to-intermediate rebound. Meaning, the market may drop significantly later in the year.
S&P 500 Large Cap Index ($SPX), Ten-Year Chart
Dow Industrials "Diamonds" (DIA)
Our viewpoint on DIA is "short-term bullish." For the past 1 1/2 months, DIA has been plummeting in price. We believe the stock is poised for a bounce back to its 50-dma. If DIA rallies, we believe it will be short-lived, since the 50-dma will probably act as resistance. We interpret any rally attempt will only be a bear market rally or counter-trend rally, that will eventually turn-around and continue the downtrend that has been in place since October '07. Any rally attempt will present an excellent shorting opportunity. The present corrective phase uptrend may only last a few weeks at best.
S&P 500 “Spiders” (SPY)
Our viewpoint on SPY is "short-term bullish." The exact same trading logic for DIA can be applied to SPY. For the past 1 1/2 months, SPY has been plummeting in price since mid-May '08. A bounce back to the 50-dma will be interpreted as a countertrend rally that is destined to fail at resistance. Soon we will return to a short sell position. We are alerting our members that the next time the index declines, it has potential of being quite significant.
Nasdaq 100 Shares (QQQQ)
Our viewpoint on QQQQ is "short-term bullish." The exact same trading scenario applies to QQQQ. We believe QQQQ will probably bounce back to its 50-dma. If this occurs, we will have a perfect set-up for a short-sell trade. Once the 50-dma is reached, the likelihood of the index crashing from this level will be extremely high.
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