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January 04, 2009

Weekly Update
by Angelo Campione

1/4/2009 8:18:15 PM

Welcome to the Advantage Report, this report summarizes the general market as well as the Nasdaq 100 and issues BUY or SELL signals when the conditions present themselves.

General Commentary:

Both the SPX and NDX remain on a full BUY signal.

Happy New Year, and it certainly was an encouraging start to 2009 on Friday. Since the last report 2 weeks ago, we're up around 5% and have broken out of an ascending triangle. All indications are quite positive now and it seems as though the stage is set for a new up wave to start. For the first time in 8 months we now have a medium term buy signal, but the question is, are we out of the woods yet?

While we've got a medium term buy signal, these signals are not the best timing indicators for entries or exits, they simply show a bigger picture change in sentiment. With this in mind, the chart for the shorter term is also bullish, but the Volatility Index is still showing a level of fear that's historically quite high and this is something to be wary of in any move higher.

My conclusion therefore, is that we're not quite out of the woods yet and while things are looking more positive, the possibility that we're seeing a false break is not out of the question. So if you're looking to put some money to work in the market, I recommend waiting for the next cycle.

On to a new year.

Bigger Picture

We've been beating this drum for a while now, but it finally looks as though we're getting the buy confirmation we've been looking for. The MACD has now crossed over and the last time the set up looked as good as this was April last year. From the chart above you can see the nice rally that developed after this crossover point in April that lasted into late May.

Of course the market can still drop from here but the momentum seems to be changing for the medium term. As long as the lows of the last few weeks hold, we should see a rally to the 200 DMA at around 1160 - 1200 over the next few months.

Smaller Picture

In the shorter term, Friday's close above the 920 resistance level was a significant break out from the trading range we've been in the last 3 weeks. The key now will be some follow through to the upside once normal volumes return on Monday. If all goes well, we should get to around 1000 in the next week or two before a little breather to test the 920 support point.

The shorts will probably be feeling some pressure right now and we could see a quick rise this coming week on the back of some short covering. Note, if this does happen, we're likely to fizzle out and come back down quickly also.

For next week, support on the SPX is 920 - 880 and resistance is 950 - 1000.

The VIX Picture

We have an interesting picture now developing on the VIX, while the market closed strongly on Friday, the VIX did not fall by much and even held it's ground, which suggests that there's still a level of nervousness out there. Clearly the VIX is in a downtrend, and this supports the market moving higher, but the implied volatility is still very high and this needs to be taken into account in making an investment decision.

Looking forward, if we can close below 35 in the next week or so, that will show a much greater level of confidence returning to the market place and a more orderly market should return.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place.

NDX Chart - Shorter Picture

The Nasdaq is in a very similar position to the S&P and has now closed above the 1240 - 1250 resistance level. Again, follow through once normal volumes return on Monday will be the key going forward.

In any event, as long as the 1190 - 1200 level can hold, the V bottom will maintain its integrity and we look good in the near term.

Any follow through at this point should see us reach 1390 - 1400 before seeing a retracement.

For next week, support on the NDX is around 1190 and resistance is 1300 - 1400.

Quote of the Week:

The quote this week is from Abraham-Hicks, "Rest seems like a nice contrast to overwhelment, but enthusiasm is always chosen over rest. The only thing that ever makes you tired or bogs you down is resistance."

Feel free to email me at angelo@stockbarometer.com with any questions or comments.

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Regards,

Angelo Campione

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