Saturday, July 10, 2010

S&P 500: Below 200 Day Average, Death Cross Continues


Bulls Rally This Week, But Overall Indicators Are Still Bearish

SPX has been below the 200 day moving average for 13 consecutive trading days. The 50 day simple moving average descended below the 100 day sma on Wednesday, June 23 - a Death Cross - and then descended below the 200 day sma on Friday, July 2 - another Death Cross. The SPX continues in both an intermediate-term and long-term bear market despite this week's rally.

The S&P 500, SPX, is up +5.42% for the week, up +4.58% for the month, down -3.33% for the year, and up +59.34% since the March 9, 2009 market bottom. In addition, SPX is down -11.45% from the April 23, 2010 YTD closing high of 1217.28.

The Euro, via the Euro/US Dollar price, EURUSD, was steady for the week at +0.59%. The US Dollar Index, USDX, has pulled back from the 2010 YTD high of 88.51 at the Monday, June 7 close to 83.99, down -0.54% for the week. The Euro holding steady at least should keep the SPX somewhat steady and the US Dollar continuing to remain below the YTD highs is bullish for the SPX. 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. Howevere, now the uncertainty over the viability of the USA economic recovery has become a variable. Suspiciion, uncertainty, and sudden onsets of fear permeate the equity markets.

Economic and Market News
The IMF issued a partial update of their semi-annual World Economic Outlook which is reviewed here. In summary, the IMF sees the world economic recovery continuing. The USA 2010 GDP projections was raised to +3.3% from 3.1%. Conversely, the Blue Chip Indicators survey of economists (just released) lowered the USA 2010 GDP from +3.3% to +3.1% and a 2010 YE unemployment of 9.4% (Reuters). Therefore, the low +3.0% area seems to be the consensus for the USA 2010 GDP. Peter Morici and others have state that a GDP of +3.0% is about the breakeven point on jobs, that is, GDP needs to exceed +3.0% to create jobs in the USA. Accordingly, based on these projections, continued slow job creation and high unemployment seems to be the "new normal".

Sentiment is "cautiously optimistic" about the global recovery. The IMF is projecting both a global and USA economic recovery slowdown in the second half of 2010. In addition, the IMF is projecting a continuing slowdown globally, including the USA, in 2011. Asia-Pacific is the most robust economic region while there is uncertainty about Europe's sovereign debt, financial system, and economic recovery. USA leading economic indicators are signalling the recovery is slowing down, perhaps even stalling. USA unemployment and underemployment remains high, bank lending continues to contract, housing starts have plunged, durable goods orders are down, and the Q1 GDP was unexpectedly revised downwards. Yet USA manufacturing shows some strength and sustainability.

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.

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, -11.45%
Russell 2000 Below 200d sma; Bear 5-26-10, Bull July 2010, -15.16%
NASDAQ Composite Below 200d sma; Bear 5-21-10; Bull July 2010, -13.19%
NASDAQ 100 Below 200d sma; Bear 5-21-10; Bull July 2010, -11.70%
Dow Jones Industrial Average 30 Below 200d sma; Bear 5-20.10; Bull July 2010, -8.99%

The two key currencies affecting the markets right now:
US Dollar Index Below 50d sma; Bull 12-21-09, Bull January 2010
Euro/US Dollar Above 50d sma; Bull 7-6-10; Bear December 2009

S&P 500: Below 200 Day SMA, Death Cross Continues

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 1077.96 (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 1080.30

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 Thursday, 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 current close, the yellow horizontal line, has pulled back dramatically since the April 23 YTD closing high. 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, about 1111, has proven to be resistance and the SPX has been below for 13 consecutive trading days.

The June 18 peak of 1118 is significant. The now distant 1150 area is another significant benchmark resistance. There was a struggle at 1150, and failure to break above, in January 2010. The 1200 area, a benchmark and milestone price, is significant, and still far away, resistance. SPX is now above the February 8 dip of 1057 and below the October 19 peak of 1098.

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 50d, 100d, and 200d simple moving averages and remains below. the 25d sma was regained on Friday, July 9. The 25d sma continues to descend and is 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. Both the 100d and 200d sma's have leveled least temporarily. SPX dropping below the 200d is disappointing. The 200d sma was last tested in early July 2009, a rally ensued.

Higher 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 40 consecutive trading days. I have left this uptrend line intact to observe whether SPX can ultimately regain this previous rate of price ascent.

Lower Uptrend Line The lower 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 on June 29. Interestingly, SPX closed at about this trendline on July 9. 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.

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 = 37.36 is slightly oversold and well above the recent July 6 abysmal low of 10.40
RSI 28 day = 48.34 is reasonable and above the May 25 YTD low of 34.09
The RSI's are off the lows but indicate plenty of upside potential.

MACD (12,26,9) The MACD switched to bullish on July 9 at +1.77. 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 1080.30 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 has 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 has caused the markets 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 in the last weeks as a result of Fear but are yet again reaching more reasonable levels. The Bears have been in control, but the Bulls had control at least for the past week.

S&P 500 Monthly Chart

Below is the monthly SPX 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.

We have no position in SPX or any related ETF.

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