Sunday, July 18, 2010

S&P 500 Hits the Wall of Worry (Charts)


Bears See Slowing Economy, Disappointing Earnings Season

Market Overview

S&P 500
The S&P 500 closed the week at 1064.88 and now has been below the 200 day moving average for 18 consecutive trading days. The 50 day simple moving average descended below the 100 day sma on June 23 - a Death Cross - and then descended below the 200 day sma on July 2 - another Death Cross. The SPX continues in both an intermediate-term and long-term bear market.

The S&P 500, SPX, is down -1.21% for the week, up +3.32% for the month, down -4.50% for the year, and up +57.40% since the March 9, 2009 market bottom. In addition, SPX is down -12.52% from the April 23, 2010 YTD closing high of 1217.28.

The Euro, via the Euro/US Dollar price, EURUSD, rallied this week +2.29% to over $1.29. The US Dollar Index, USDX, has pulled back from the 2010 YTD high of 88.51 at the Monday, June 7 close to 82.56, down -1.70% for the week. There has been some disconnect between the Euro, US Dollar, and S&P 500. The Euro had been the tail wagging the dog, that is, the Euro goes down then the US Dollar Index goes up and the SPX goes down or all of this vice versa. However, now the uncertainty over the viability of the USA economic recovery and a disappointing earnings season has become a variable. The Euro rallied  this week but the S&P 500 did not.

Major USA Equity Indexes
The Russell 2000, NASDAQ Composite, NASDAQ 100, S&P 500, and Dow Jones Industrial Average 30 have all fallen well below the 2010 YTD highs. The bullish trends are broken. For comparative purposes, the current price status, intermediate-term and long-term trends, dates generated, and the percentage off the 2010 YTD high are:
S&P 500 Below 200d sma; Bear 5-20-10; Bear June 2010, -12.52%
Russell 2000 Below 200d sma; Bear 5-26-10, Bear July 2010, -17.73%
NASDAQ Composite Below 200d sma; Bear 5-21-10; Bear July 2010, -13.88%
NASDAQ 100 Below 200d sma; Bear 5-21-10; Bull July 2010, -12.25%
Dow Jones Industrial Average 30 Below 200d sma; Bear 5-20.10; Bear July 2010, -9.88%

The two key currencies affecting the markets right now:
US Dollar Index Below 100d sma; Bear 7-13-10, Bull January 2010
Euro/US Dollar Above 100d sma; Bull 7-6-10; Bear December 2009

Economic and Market News
A review and weekly update of USA and World market and economic news and fundamental analysis is here. The IMF issued a partial update of their semi-annual World Economic Outlook as of June 30 which is reviewed here. The full semiannual World Economic Outlook issued in April is reviewed here. In summary, the IMF sees the world economic recovery continuing. Sentiment is "cautiously optimistic" perhaps leaning to "extremely cautious optimism" about the global recovery but it appears a second half 2010 slowdown is in progress for the world and the USA.

USA Quarterly Earnings Season
Earnings season began this past week and it is not going well overall. Bank of America, Citigroup, and General Electric were a disappointment with low revenues yet high profits. This indicates that cost cutting, not demand, is driving up profits . This next week should determine the mood of the market towards earnings season - bullish or bearish. First quarter earnings were very encouraging, especially in the technology, financial, and industrial sectors but the second quarter needs to exceed.

The Big Question What happens now? Up, Down, Sideways?
We have several major market issues and variables. Overall, I continue to foresee more sideways trading and possible high volatility, with a downside bias until some of this market turmoil settles down. By market turmoil, I mean the EU Crisis primarily and now uncertainty about the strength, even the viability of the USA economic recovery secondarily. Only then will the bottom, and therefore support, be in. Doug Kass stated on July 7 a summer rally has arrived and will continue through earnings season, which starts Monday. Hopefully, he is correct but there are a lot of bears calling the reverse.

Volatility has been high since the VIX put in a bottom in mid-April. The VIX topped out at a YTD closing high of 45.79 on May 20. VIX is now at a calmer 24.98 and is down -17.7% for the week. Hopefully this signals the SPX can hold this week's gains, barring more bad news out of Europe or dismal USA economic data.

S&P 500 Hits the Wall of Worry

S&P 500 Daily Chart Below is the SPX daily chart for 2010. A monthly chart is included at the bottom of this page for a broader perspective.

Noteworthy Closing Prices on Daily Chart Below
Current Close 1064.88 (Yellow horizontal line)
2010 YTD High 4-23-10 1217.28
2010 YTD Low 7-2-10 1022.58
YE 12-31-09 1115.10
10 Month EMA 1077.92

Intermediate-Term Trend The intermediate-term signal, the comparison of the 25 day and 50 day simple moving averages, signaled a bear market for the SPX on May 20. That is, the 50d sma is greater than the 25d sma. An intermediate-term bull market had previously been in effect since March 16.

Resistance The 50 day simple moving average (1090.21) has proven to be the key resistance this past week. SPX regained the 50d sma on July 14 only to drop back below on July 16. This was the first time SPX has closed above the 50d sma since May 2! The current close, the yellow horizontal line, has pulled back dramatically since the April 23 YTD closing high of 1217.28. There are multiple levels of resistance above. The 1100 area, a benchmark and milestone price is the next significant and important resistance. The 200 day simple moving average (1112.35) has proven to be resistance and the SPX has been below for 18 consecutive trading days.

Support There are multiple levels of support below. The 200d sma had been support that failed. The 2010 YTD closing low was set on July 2 at 1022.58 is absolutely critical support. The previous 2010 YTD closing lows of 1050.47 and 1056.74 on June 7 and February 8, respectively, are important support. Both of these prices are key benchmarks and psychological prices for support. Based on the volatility of the market, these support prices still are not far below.

Moving Averages SPX has plunged through the 25d, 50d, 100d, and 200d simple moving averages and is now once again below. the 25d sma. The 25d sma is descending and below the 50d, 100d, and 200d sma's. The 50d sma is plunging and crossed below the 100d sma on June 23, a Death Cross, and below the 200d sma on July 2, another Death Cross. The 100d sma is slightly descending and 200d sma is slightly ascending. SPX dropping below the 200d and failing to hold the 50d is disappointing.

Highest Uptrend Line The higher yellow uptrend line, a measure of the rate of price ascent, is from the March 9, 2009 closing low of 676.53 up through the February 8, 2010 closing low of 1056.74. The February 8 closing low of 1056.74 was the bottom of the first 2010 pullback, before this current plunge and new 2010 YTD low. SPX broke through this uptrend line on May 13 and has been below for 45 consecutive trading days. I have left this uptrend line intact to observe whether SPX can ultimately regain this previous rate of price ascent although this seems more a remote possibility each week.

Middle Uptrend Line The middle yellow uptrend line, a rate of price ascent, is from the March 9, 2009 closing low of 676.53 up through the previous 2010 YTD closing low of 1050.47 set on June 7. SPX broke down through this trendline for a second time on July 16. I have left this uptrend line intact to observe whether SPX can ultimately regain this previous rate of price ascent. Yet another trendline could be drawn utilizing the new 2010 YTD closing low of 1022.58 on July 2.

Lowest Uptrend Line The lowest yellow uptrend line, a rate of price ascent, is from the March 9, 2009 closing low of 676.53 up through the current 2010 YTD closing low of 1022.53 set on July 2. SPX has stayed above this trendline since the next trading day, July 6.

Downtrend Line The downtrend line, a measure of the rate of price descent, is from the October 9, 2007 all-time closing high of 1565.15 down through the April 23, 2010 YTD closing high of 1217.28. SPX has remained well below this downtrend line since.

Relative Strength Index (RSI)
RSI 14 day = 46.29 is reasonable and well above the recent July 6 abysmal low of 10.40
RSI 28 day = 52.47 is reasonable and above the May 25 YTD low of 34.09
The RSI's are off the lows and indicate plenty of upside potential.

MACD (12,26,9) The MACD switched to bullish on July 9 but is downtrending after the July 16 downdraft. MACD had plunged to -11.44 on May 7, the lowest reading since the October 2008 panic. MACD peaked on June 18 at the highest since the rally off the bottom in March 2009.

Long-Term Trend The 10 month exponential moving average of 1077.92 is a long-term trend indicator and shown on the monthly chart below. That is the line in the sand, so to speak, for the long term signal of a bear market. SPX is below this signal. SPX initially dropped below this signal in late May, indicating long-term bear market had arrived and has regained and lost the indicator several times which indicates uncertainty and lack of trend.

Conclusion Uncertainty over the continuation of the USA economic recovery and the Euro Crisis have caused the markets to break the bull market trend that began in March 2009, with a downside bias. The intermediate term trend continues bearish and the long term trend is neutral to bearish. The technical indicators such as resistance, support, trendlines, RSIs, and MACD had been pushed to extremes since the April 23 YTD peak. The Bears, the Sellers, are back in control as of July 16. This next week of earnings season will determine if the Bulls can rally.

S&P 500 Monthly Chart

Below is the SPX monthly chart since January 2005. The overall analysis and commentary are the same as for the daily chart above. The yellow horizontal line, the current price, plus the yellow downtrend and uptrend lines are the same, and as described, on the daily chart above. The white moving average line is the 10 month exponential moving average, which is the long-term bull or bear market signal, as discussed above with the daily chart. SPX is currently below the 10m ema which signals a long-term bear market.

We have no position in SPX or any related ETF.

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