TDEN

Right now the S&P is bumping its head against the 21 day moving average (the light grey line) and appears to be hitting stiff resistance here. The MACD is below 0 but may be turning up and the stochastic is heading higher. Volume has been steadily decreasing since the April top. If the market does rally it will probably be capped at the upper downtrend line that is about 1200 on the S&P. A decline would bring us to at least the lower uptrend line that is around the 1020 area.

A break of either trend line in the current time frame would indicate approximately a 200 point move on the S&P in the breakout direction. If the break is to the downside, the move could be doubled. If that were to happen things could get really ugly as we could be testing the bear market lows of 2008.

It should also be noted that the longer the index stays in this pattern the smaller the breakout move will be. In any event the S&P is going to be forced to breakout in either direction within the next few months. If it breaks out right at the apex there may not be any significant move in the market in either direction and we could wind up with a range bound market.

Since we are very near the treacherous September-October time frame, the leading U.S. economic indicators are weakening, and there are numerous other bearish patterns and indicators on the major charts, I suspect the ultimate resolution will be to the downside although that is in no way a definite outcome.

The market has been reacting to dollar weakness and Euro strength, but the Euro at 130 is hitting resistance from a long term downtrend line and this situation could reverse on a dime. Interestingly enough, the pundits have been wrong about bonds. All we have been hearing for the past year is that yelds have to go up due to the massive debt that is being accrued by world governments but so far the exact opposite has happened. Any one who has attempted to short bonds during this time period has gotten crushed.

Volume has been steadily declining since the April top, the MACD is under 0 and has stayed there since May even though there have been counter trend rallies, and the stochastic is in overbought territory. If you compare the stochastic movements to the SPY price movements, the stochastic has been a reliable timing indicator for market turning points.

The VIX has dropped to the uptrend line formed from the April low and it has also formed an equilateral triangle. According to the stochastics the VIX is in oversold territory. While it is not shown in the chart, the VIX has pulled back right to it’s 200 day moving average.

The problem here is that the VIX has never really dropped to more normal levels during any of these rallies. This indicates that the professional traders are not buying into the rosey scenario currently being announced by the talking heads at CNBC.

While the market did reverse to the upside from below the neckline of the head and shoulders pattern, I suspect that this rally is just about done and another right shoulder will be formed before the market plunges.

Due to good earnings being announced by Intel and other companies, I would not be surprised to see an initial move up tomorrow followed by a larger move down. The problem with earnings is that it is past history that is already priced in. While intel did give good future guidance on chip sales, that guidance has not been affirmed by the computer manufacturers.

We can now see a well defined left shoulder, a head, and the left side of a right shoulder. The shoulder line is at 1050 that historically has been a transitioning area between up and down markets.

We are definitely heading to the shoulder line. The question is what will happen when we get there. If the market can reverse to the upside on good volume that would be bullish and would negate the head and shoulders pattern. A break through the neckline, however, has a projected downside to 900.

According to Elliot Wave Theory, market declines occur in 3 waves. So far we have one wave down, a smaller wave up and the third wave down should be the longest. I believe the market is headed lower and the decline is going to be contained within the 2 downtrend lines 1 & 2.

The first thing you will notice is that a massive diamond topping formation has occurred. The lower left leg of the diamond is the upper part of an intermediate term downtrend channel.

Between May and June the market found support at it’s long term uptrend support line, hit resistance at it’s alternate long term support line, dropped back down to it’s long term uptrend support line and then bounced off that and rallied back to it’s alternate long term support line. That is where we stand now.

If we take a look at the volume indicator it has been declining and hitting a lower high on each rally attempt. This is a negative divergence indicative of a weak market.

The MACD is also indicating a negative divergence as it hit a lower low in June than it did in February even though the SPY was at 1050 both times.

While they are not shown in this chart, the 21 day moving average crossed under the 50 day moving average on May 18 giving a short term sell signal and it then crossed under the 200 day moving average on June 7 giving an intermediate term sell signal.

When taken together from a technical point of view the chart of the SPY looks totally bearish and it is my guess that the current rally is a bear trap that has peaked out. I expect the rug to be pulled out from under investors feet very shortly.

We should anticipate a drop of the SPY into the intermediate down trend channel. If the Dow drops to 9000 that would be a full 20% correction from its peak on April 26. A 20% correction in the S&P from it’s peak would bring it to 976. In all likelihood both indices will overshoot to the downside scaring the living daylights out of investors.

Since the talking heads at CNBC are of the opinion that a 20% correction is a bear market, the day they announce the fact that we are now in a bear market will be the buying opportunity of a lifetime.

It is possible that what looks like the right shoulder may actually be part of the head as the large sell off on May 6 was quite abrupt. There are 3 possible scenarios that may occur:

1) Upon reaching the neckline the market will resume its rally and break out to new highs. Based upon current market conditions this seems the least likely outcome.

2) Upon reaching the neckline the market will retrace about 50% of the current sell off bringing the S&P to 1150 and Dow to 10,500. There will then be a decline to the neckline forming another right shoulder. At this point the market will either A) reverse to the upside thereby negating the head and shoulders pattern or B) it will fall through to the projected lows as stated in the title. B seems the more likely outcome.

3) The market will break through the neckline without any further rally. In all likelihood there will be a back test of the neckline and then further declines to the projected lows.

The target for the head and shoulders pattern is calculated as follows: The neckline – (the top of the head – the neckline). This is the same as 2 x the neckline – the head. On the SPY that is (105 x 2) = 210 – 122 = 88. On the DIA that is (99 x 2) = 198 – 112 = 86.

Interestingly enough, the neckline that defined the reverse head and shoulders bottoming pattern that preceded the rally from the March, 2009 lows is right around the level of the projected decline of the current head and shoulders topping pattern on both the SPY and DIA. That is where I believe the market will find major support and the bull market will resume. The mathematics of this situation works out so precisely it seems inevitable that it is going to happen. The projected time frame for this drop is approximately 2 months.

With Germany expected to ratify the Euro agreement to bail out Greece I anticipate that there will be a short covering rally that will bring the SPY to about 115 and DIA to 105. Therefore I am inclined to believe that option 2B will be the actual outcome.

Noble Corp (NE), an oil and gas drilling contractor, has been trading in a well defined parallel channel ranging roughly between $39. and $45 since Oct., 2009. This looks like an extended bull channel and NE has just bounced off the bottom of the channel and is now trading at $39.27.

The slow stochastic has just given a buy signal and from oversold levels. There is also a doji candle stick that many times indicates a price reversal. The chart on NE looks bullish and the stock has been consolidating for 7 months. I believe NE could quickly trade to the upper end of the channel at $45 and then break through the top end to see even higher prices.

I don’t believe the Gulf situation will stifle world-wide oil exploration and NE has clients around the world. China and India are thirsting for oil so exploration will continue regardless of any mishaps. With rising oil prices and more equipment being tied up in the Gulf of Mexico I believe NE’s assets will become more valuable.

One could buy the stock here for a possible 15% gain. I would set a stop loss at $37.70 and look to take profits at or near $45. You are risking $1.57 per share loss for a $5.73 per share gain. Your reward to risk ratio on the trade is a healthy 3.64 or 364%. In other words you will make $3.64 profit per share if the trade goes well as opposed to taking a $1.00 loss per share if it doesn’t.

I have drawn a line where the current bear market downtrend was broken. This coincides with a horizontal line drawn at the S&P 1150 area. This line clearly separates the upper half of the chart from the lower half. When 2 major trend lines intersect at a price point it gives that price more importance. Therefore S&P 1150 should see extremely strong price support. If that level is broken the S&P could drop to as low as 1050 or lower and still be trading above the bear market downtrend line. If the downtrend line is penetrated that would be an indication that the bear market has resumed and a re-test of the bottom of the channel should be anticipated.

The improving worldwide economic situation so far has not resulted in a meaningful improvement to the U.S. employment picture. It is not unusual for workers to have to re-train themselves after a recession as improving technology and world wide competition causes jobs in older industries to fade away. Therefore we should expect the stock market to continue its march upward. If the bear market in stocks does manage to resume and the S&P subsequently hits the bottom of the megaphone pattern, we would be looking at about S&P 600 and Dow 5500, not a pretty picture.

One money manager called the rally off the March, 2009 lows a sucker’s rally. The only suckers are the ones who didn’t participate in at least some part of a 70% market move. Obviously one should not mindlessly just buy and hold a stock forever as profits should be taken along the way. Another event that is being waited for is the 10% correction. I’m not sure why a market has to correct 10% or at all but I suspect that is another event that may not happen since so many people are expecting it.

The market move upward from the March, 2009 lows has been fast and strong and at this point shows no signs of slowing down. If the world economy performs better than anticipated, it would not be surprising to see the stock market continue its meteoric rise to the top of the channel.

The key indicator to watch is the vix. The vix is now near the top of its downtrend channel that has been in place since March, 2009. The vix is getting squeezed between its rising 21 day moving average and its descending 200 day moving average. We will not know the ultimate resolution to this scenario until the vix either breaks out of the channel to the upside or resumes its trend to the downside of the channel. A breakout to the upside would indicate a trend reversal that could be significant.

Based upon today’s price action, it appears that S&P 1100 is the line in the sand where the bears are going to make their stand. If we can get above that level we should see a massive short covering rally possibly sending the market to new highs.

From a fundamental point of view irrational fear has overtaken the markets but markets rarely act rationally nor do they always go up. Everyday the market commentators have some specific reason why the market either goes up or down but for the most part those reasons are bogus. In the long term markets tend to move in cycles regardless of what the commentators have to say.

The retail investor is the first to panic but most retail investors have sit out the rally due to fear of further losses so I do not believe there have been enough participants for the bear market to resume at this time. Many companies with cash have been buying back their stock since the March, 2009 lows thereby limiting the supply of stock in the market so this puts a further constraint on the potential market downside. Many companies have been reporting excellent earnings and increasing dividends so this also provides further support for the market.

According to various sources, insiders have been selling a lot of their company stock but I have found this to be a poor indicator of anything. Many times insiders sell loads of stock only to see the stock price rise in value and the opposite is also true. In any case both the CEO’s of Cisco and Novellus say business is booming in the IT sector. With Apple and Amazon reporting blow out earnings the consumer is obviously far from dead. Interestingly enough the retail sector whose untimely death has often been predicted was the only one that gained in the markets today.

The carry trade of selling U.S. dollars and buying everything else is also winding down due to the strengthening dollar. The correllation between the rising U.S. dollar and the dropping stock market however is not clear cut. The dollar has been in an uptrend since Dec, 2, 2009 but the stock market continued to rally until Jan. 20, 2010. There also seems to be a disconnect between the dollar action and commodities as on some days they all head in the same direction and on other days they diverge. It appears that each market is moving to the rhythm of its own beat. In any event first the yen was used for the carry trade and then the dollar. I would not be surprised to find another vulnerable currency such as the Euro being used to fund the carry trade in the near future.

The average correction since the March, 2009 bottom lasted about 2 weeks with the one from June-July 2009 lasting about 4 weeks. So far we are 12 days into this correction. During each correction there was the same doom and gloom scenario as market sell-offs are never pleasant. A perma-bear whose newsletter I receive announced today the official end of the bull market. Interestingly enough, just a few weeks before the correction began he told his subscribers to sell their shares in DOG for a loss as he believed the bull market was in full force. DOG is an inverse etf that goes up when the Dow Jones Industrial Average goes down. Talk about bad timing.

It is way too early to tell if the bull market is over as all the major averages are well above their 200 day moving averages and there have been no bearish moving average crossovers. At this point in time the major trend is still up and regardless of the day to day market fluctuations this trend appears to still be strong.

The chart on SPY looks identical to that of the QQQQ. As I indicated in the last update GLD is also at the bottom of it’s long term uptrend channel. Since Jan. 10 the SPY has been in a descending wedge that many times indicates a reversal. With everybody expecting more selling, sentiment extremely negative, selling volume large on the way down, the vix already spiking about 45% and the markets way oversold, I believe we are heading up with the Nasdaq, Chinese stocks, financials, Gold and miners leading the way. I also expect the U.S. dollar to decline.

The alleged headwinds to the market are:

1) Greece – About 6 months ago Dubai was going to bring the world economy down and now it’s Greece. While I am sure that Greece is a lovely country, the notion that financial problems there are going to bring the world markets down is laughable at best.

2) Slowdown in China – China’s economy is going to slow down from about 10.7% growth to 10%. We wish we could have a slowdown like that here.

3) The World Economy Grew Too Fast – I find this one to be really hilarious. First the pundits said the Obama plan would never work. Now that the U.S. racked up 5.7% GDP growth last quarter with many companies turning in record profits they are saying we grew too fast with the implication being that it can only be downhill from here. With the economic recovery just getting started and much of the stimulus kicking in this year we should expect further upside economic surprises.

4) A Jobless Recovery – Many companies just announced that they will start hiring in the spring.

Some stocks you may wish to consider buying are AMZN, AAPL and GOOG. These are high beta stocks and are extremely volatile but they will be the first to hit new highs if the market does move up. Some Chinese stocks to consider are CTRP and CRIC. CTRP has a virtual monopoly on Chinese travel arrangements and CRIC on Chinese real estate information services. If you wish to play gold, GLD is the etf for a straight play on the price of gold and GDX is an etf for gold miners. A new etf with the symbol GDXJ that covers junior miners recently came to market and this could move even faster than GLD and GDX.

Except for extremely long term investors this is not a buy and hold market so sell 1/3 of your shares if the S&P hits 1120, 1/3 at 1150 and 1/3 if it hits 1200. Move your stop loss up at each target price.

Companies like Google and Goldman Sachs reported blow out earnings but there was a sell on the news effect when the President started talking about regulating banks. Some democrats are now saying that they will not support Ben Bernanke’s reappointment as Fed Chairman. China has also announced it is tightening credit at least temporarily. According to some analysts that I follow and who live in China, that country is not in a bubble economy at all as they run a cash economy. Bull markets climb a wall of worry and that wall seems bigger than ever now but there is a wildcard present in the form of the politics that is currently being played out.

While some technical damage has been done to the major indices, the market is sending mixed signals and is clearly going through a period of indecision. Some stocks have cratered, some have pulled back to support levels and others have rallied. Corrections are perfectly normal in bull markets and the market has already corrected 5%. The markets quickly moved into oversold territory so I would expect at least a bounce to the S&P 1120 area. The bears are in all likelihood aggressively shorting this market so if there is a rally it’s possible that short covering could push the market to new highs. In any event I do not see any reason at the present time to panic.

Ben Bernanke will probably be reconfirmed and that may be the impetus needed to send the market higher. If for some reason he is not confirmed, that would be extremely negative for the markets as it is unclear who would take his place and what subsequent Fed policies might be. With Bernanke in control we know that he is going to continue to flood the markets with liquidity until the economy is self-sustainable.

Unfortunately the Republican Party starting under Bush and Cheney has become the Republican Party of old: pro-rich and screw everybody else. Their economic plan calls for reduced spending, cutting taxes and increasing interest rates. To implement those proposals at the present time would be economic suicide. The Republican’s exist for one purpose only: to oppose the Obama administration.

Now there are allegations that Timothy Geithner was involved in some sort of cover-up regarding the AIG bailout and that Bernanke had to have known about it. I’m not exactly sure what was allegedly covered up but I’m certain the Republicans will milk it for every ounce they can squeeze out of it. From what the Republicans have been saying, they could care less if the market crashes and people’s IRA’s get wiped out yet again. They’re a real bunch of working class heros.

I was watching a special on the great depression and while people were lined up in droves at soup kitchens just to eat, Henry Ford was on the radio expounding the benefits of hard work and enterprise. It is difficult to work hard and be enterprising when you can’t find a job, can’t borrow money, and can’t pay the mortgage. Thanks Dr. Henry, that’s just what the dying patient needed, a good pep talk. I’m sure he must have been a Republican.

Here is a 2 year chart of GLD. You will notice that it has been in this wide uptrend channel since August, 2008 and it is now sitting near the bottom of the channel. The stochastic is in oversold territory and has consistently rallied to some degree off these levels. While the U.S. Dollar has rallied and could possibly rally more, I believe that this is just another bear market rally and the downtrend in the dollar will eventually resume.