Time to Step Back -- Quarterly Chart Review

On the quarterly chart of the cash S&P500 we had a very strong up trending bar …. That makes two in a row from the recent low of 666 set in March 2009. Notice how we were able to keep contact with the Long (green) moving average at the low. Since the low the up move continues to look like a bear market rally.

The only positive signal at the low (in the technical indicators I follow) was the TDPOQ on an 8 period TD REI which turned positive when price went above 956.23 in July. Without confirmation I consider that as indicating an oversold counter-trend rally. The REI now indicates that the oversold condition has been relieved and at this point the market is still in the process of determining what the demand level is for stocks is after the huge decline of 2008.

There is a broad area of overhead resistance from 1120-1170 (50% Fibonacci retracement level, previous TDST Support and the Medium (blue) moving average). Above that is 1225-1240.

Bottom Line: The quarterly chart indicates that the bear market rally from March is maturing and that long-term investors should not yet be worried about “missing the bottom”. At the same time it certainly is not inviting anyone to go short. The battle for the rest of the year may very well be the 903 level. If we close above that value at the end of the year the odds of a significant new low become quite low and a double bottom around 666 becomes more likely.

Monthly Review - July 2009

We had an “outside” bar with a higher close in July. The portion of the bar below the June close was a hesitation in the strong bear market rally from the March low. The rally then resumed and punched through the 923-930 target range calculated at the end of May as well as the 971 target and short (red) moving average. The next target up is 1012-1028.

The monthly chart perfected its TD Buy Setup in February and has worked out quite well. Since countertrend rallies usually only last about 4 price bars in time we have reached the period when we need to watch for the resumption of the downtrend.

Bottom Line: The monthly chart remains short term bullish but argues that longer term investors should remain wary of equities -- this is the first time the TD REI oscillator (top pane) has moved into overbought territory since 2007!

Weekly Update

A downward trending week on the cash S&P500 has triggered several negative events. After breaking through TDST Resistance at 890.4 the week ending May 8, the break was not qualified as we failed to make a higher high this week. The S&P also negated the previously in-force TD Supply line bullish price objective by breaking below the TD Demand line this week at 895.42. We will qualify a price projection to 837.81 by breaking below 878.94 next week.

The weekly TD REI (top pane of today’s chart) signaled a “sell” by dropping through 879.21.

Bottom Line: I believe that a deep retracement of the rally from March 6 has begun, but continue to think that the lows for the year (though perhaps not the bear market) are in.