3 Weeks To Go
8/2/2009 6:54:50 PM
The system remains on a Neutral signal.
Last week was another positive one, with a continuation of positive earnings announcements although now momentum seems to be slowing down as we approach some key resistance points.
Remember that the market loves to do the unexpected and going higher as it did on Thursday, was unexpected. If the participants start to think that the new highs = a continuation of the good times, you can bet the opposite will happen. On the other hand if they think it's time to short, then another advance becomes likely.
In last weeks report, I spoke about the rubber band effect and how prices are being stretched too far to the upside. Now with prices going higher again, we're getting to what seems to be a perfect shorting point. The market may still go above 1000 this week, just to see if it can encourage some more fresh money to make its way in, although the odds favor that there'll be a better point to go long down the track.
At this stage the medium term remains positive but I don't think we'll see the same sort of gains that we've seen of late.
For the week ahead we may see a "musical chairs" type environment develop, where everyone jumps to lock in profits as the music stops. This could then lead to a swift 5% or 6% down move by this time next week.
On to the analysis...
SPX Chart - Bigger Picture
We got to within a few points of 1000 this past week and the linear MACD continues to look positive although the MACD histogram is not as strong, also the RSI seems to weakening. When you add in the resistance lines, the odds say that 1000 is it for now.
The likelihood is that we dip down to touch the lower uptrend line, between 930 and 950, before retesting the highs around 1000.
After such a large advance in three weeks, we could be in for a relatively dull period in August as we fill the potential bearish wedge pattern that's developed over the last five months.
SPX Chart - Shorter Picture
The shorter term shows how the market consolidated up to Wednesday and then went on to make a new annual high on Thursday, however the indicators didn't respond as positively and now we have divergence on the RSI and also the MACD is getting close to crossing over.
Interestingly, we have a mini bearish wedge that looks very close to breaking. If you're fully long at this point it may be wise to lighten the load here. Of course the market can go higher and break the 1000-point barrier, but evidence is building for a retreat, even if it's just a small one.
For the week ahead, support on the SPX remains at 930 - 950 and resistance at 1000.
The VIX Picture
The VIX broke out of its bullish wedge this past week and now looks destined to reach the 50 DMA at around 28. Whether it can continue higher is another question, the linear MACD has crossed again but still remains below zero. The likelihood is that the VIX will remain between 23 and 28 for the near term.
What does this mean for the market? We'll probably see a dip soon but nothing too dramatic.
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. It tends to move inversely with the markets.
The current position from July 20 is a full position in an SPX August 1020/1030 Call Option Spread for a net credit of $0.60.
The premium received if you entered this trade is $60 per $1,000 of margin required per spread (before commissions).
In relation to our open position, we have 3 weeks to expiry and just over 30 points from the sold strike. It's still not as comfortable as we'd like and we may look to close this out if the market dips this week. We'll see how the market behaves around the 930-950 support level (assuming it gets there).
Current Performance for 2009:
(Please note, this performance is in percent and raw, i.e. without brokerage/commissions taken into account)
Quote of the Week:
The quote this week is from Howard Thurman, "Don't ask what the world needs. Ask what makes you come alive, and go do it. Because what the world needs is people who have come alive."
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