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:
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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.
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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.
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for The Daily Reckoning Australia