Market Correcting; Long Term Trend Still Intact
Extracted from the Oct 28, 2012 Market Update
The markets have been putting in lower highs since the 14th of Sept as indicated by the two charts below.
The overall trend remains bullish as indicated by second (lower) purple line. The first line represents the top of the price channel where the SPX is expected to run into sold resistance and mount a strong correction. This roughly correlates to the 1510-1550 ranges. However, the shorter term trend as indicated by the downward channel formation (two blue lines clearly illustrate that the short term trend is weakening. It would need to close above 1465 on a weekly basis to alter the near-term outlook.
This is the same chart (SPX), but we zoomed in and our only looking at the last 6 months. You can clearly see that the resistance presented by the 1465-1475 ranges and the support that comes to play in the 1380-1400 ranges. The downward trending channel (blue lines), and the sideways trending channel (brown lines) meet at roughly the same point. If the 1380-1390 ranges are taken out, then there is a very good chance that the SPX could test the 1300-1330 ranges. From a longer-term perspective, there is nothing to indicate that the uptrend is over, but the recent action in the markets suggests that the markets could experience a faster and sharper move down, before the dust settles down.
As we stated in the last update volume in terms of the short to intermediate time frames has not increased dramatically on down days, so there is no indication, at least yet that momentum is building up for a large sell off. While the market is trending lower now than it was back in September, the volume has not once made it to the 4 billion share level. The last time the volume surged to or past 4 billion shares was on the 21st of September when the Dow looked like it would end the day in the black but ended the day in the red. The highest volume day in over six months still took place on a day when the Dow closed in the black. On an intermediate basis, this is a bullish development.
As the short term trend continues to weaken there is a very good chance that a failure to break the pattern of lower highs could result in the SPX breaking through support provided in the 1380-1390 ranges. In order to break this pattern it would need to close above 1460 on a daily basis and then above 1465 on a weekly basis. The internal structure of the market is weakening and at least for now, it indicates that the market is in a simple corrective phase. Volume also seems to confirm this outlook. Given the weakening of the short term trend, there is a good chance that the SPX could trade down to the 1300-1330 ranges. The markets move rather fast these days, and it’s not always easy to take advantage of the very short term moves. If the SPX starts to run into resistance in the 1450-1465 ranges, then those willing to take on a bit of a risk, could short the SPX via leveraged ETF play such as TZA or FAZ and look to quickly close these plays on a test of the 1330-1340 ranges. Place a stop at 1475.00. Speculators can play both sides, use puts or short futures and then reverse and go long via calls or futures contracts. However, in the long run the bullish outlook still holds and using pullbacks to open long positions would make for a safer bet.