A Contrarian View

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Back on the 24th August I warned of an imminent sell off because the market was resting on some important technical levels. This view turned out to be wrong. The market found support at these levels and has rallied strongly since.

So does that mean I have changed my view on the markets and become bullish?

No. I haven’t thrown in the towel yet. The market is still trading in a range and nothing that has happened in the past few weeks has changed that.

I have had a key sell zone traced out in the S+P 500 for months now as this chart from the 11th of June this year attests:

S+P 500 chart from the 11th of June 2010

S+P 500 chart from the 11th of June 2010
Click here to enlarge

Since that time the S+P 500 has been rejected from that zone twice with current trading seeing a third attempt at busting up through 1150 in the S+P 500.

S+P 500 Daily chart

S+P 500 Daily chart
Click here to enlarge

1140-1160 is the Key area that I am focused on going forward. Any reversal in this zone with a close under 1131 will be the best sell signal I have seen in the S+P 500 all year.

Set ups such as this are few and far between and I will be attacking the market with all I have if this were to occur.

The US markets rallied 1.5% overnight with the news that the NBER (National Bureau of Economic Research) had announced that the Recession ended in June last year. This sounds like old news to me and a poor reason for creating new highs in this rally. We know that the economy has been growing. The real news is that the growth has become anaemic again now that the stimulus is wearing off.

The market is still 27% higher than it was in June last year so we have already seen the rally on the back of a return to growth. The real question is whether or not current prices are justified with the recent spate of poor economic reports.

The rest of this week will see some interesting news coming out on the back of the FOMC meeting and some expected data on housing and employment and durable goods orders.

I am confident that the market is getting ahead of itself at the moment and will stand by my view that we are on the cusp of a large sell-off.

We do need to see some confirmations of weakness before we can become completely bearish.

The 10 day MA is still holding above the 35 day MA confirming that we are in intermediate uptrend.

Therefore it will not be until I see a close in the S+P 500 under c. 1100 that I will be highly confident of further downside.

It is interesting to note that the 200 day moving average is also at 1100 in the S+P 500. A close back under this level will be a false break of the 200 day moving average and will signal further downside.

I will not be proven wrong in my view until we see a sustained move in the S+P 500 above c. 1180.

If that were to occur in the next few weeks I will need to go back to the drawing board on my view of the markets. But until that happens I am going to stick my neck out yet again and say that this price action is setting up the best shorting opportunity since the highs in Mid-April.

Editor’s note: to learn more about how Murray can help you make small cap sized gains from large cap stocks, click here.

Murray Dawes
for The Daily Reckoning Australia

Murray Dawes
Murray began his career on the Sydney Futures Exchange trading floor in 1993 with Swiss Banking Corporation (SBC). He spent a couple of years in the 3 and 10 year bond and option pits before moving on to the Share Price Index (SPI) futures and options pit. From there he became a broker with SBC specialising in SPI futures and options to institutional clients. After leaving SBC Murray continued his career in broking at Bankers Trust Australia. Then in 2001 Murray moved to Melbourne to work as a hedge fund trader for one of Australia’s wealthiest families. In 2003 he was ready to set up his own firm providing the same proprietary technical trading system to some of Australia’s boutique hedge funds. The success of Murray’s system led to him trading a $10 million account for a high net worth individual. This involved trading Australian and US futures and Australian stocks. Now Murray heads up the technical analysis desk for us passing on to readers some of his experience from 16 years of trading.
Murray Dawes

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