June 2009 Update

Although it was an uptrending month we also saw a hesitation in the strong bear market rally from the March low – we closed June at virtually the identical level that we ended May. This is the second month in a row where we have failed to close above the 923-930 target range calculated at the end of May.

The monthly chart perfected its TD Buy Setup in February. 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. As you know the weekly chart has turned towards the bearish side; I will update that chart tomorrow.

Quarterly Chart Update

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On the quarterly chart of the cash S&P500 we had an uptrending bar in 2Q2009…. The first one since the all time high in late 2007!

Overall the market continues to consolidate: since two retracement levels were violated in one quarter (4Q2008) we should then look for the market to either reverse or consolidate. Without a technical buy signal at the 1Q2009 low the consolidation is the more likely option. Currently the market is still in the process of determining what the demand level is for stocks after the huge decline of 2008. Note that the consolidation is occurring around the long moving average (now at 849.06).

Bottom Line: We still have at least three quarters to go before a potential bottom is in place. Being a longer-term investor this is driving my negative outlook on equities right now.

I will take a look at the new monthly chart over the weekend.

An Outside Day

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After reaching the 61.8% retracement level the cash S&P500 index turned down before once again finding support at the confluence of the short (red) and intermediate (blue) moving averages. It wound up being an outside day.

At this point I still believe that the index will reach the target zone of 937 – 946 unless the TD Demand Line can be broken (and confirmed). It sits at 911.09 today. Even with a continuation of the rally that reaches into the target zone I am bearish on the equities due to the recent sell signal on the weekly chart and lack of perfection on the daily chart’s DeMark Buy Setup.

I will post a quick look at the new quarterly chart tomorrow and the monthly chart over the weekend.

Equities Still Acting Like Commodities

The cash S&P500 found support at the confluence of the short (red) and intermediate (blue) moving averages yesterday and then moved higher to form another “uptrending” price bar.

As noted previously, the break of the supply line projects to 937.17, TD Resistance is at 946.21 and the TD Trend Factor target at 944.86. These three numbers give a target zone of 937 – 946. Now that we have moved above 927.09 I think we are headed towards that target zone.

Please note that the equities continue to act like a commodity (tracking the CRB index). Both bottomed early last week and are now retracing their declines from the June 11 high. If the CRB can close above 260.21 (254.31 yesterday) it will complete a TD Sequential Sell Countdown (It already completed a TD Combo Sell and had a technical sell signal with the June 11 high). Since the weekly CRB is not on a technical sell signal yet (although we have had a perfected weekly TD Sell Setup) a weekly CRB close above 262.25 may be needed before this bounce has run its course.

Let’s see how the market acts on this last day of the quarter.

927.09 Key to the Short Term

The cash S&P500 formed an “uptrending” price bar on Friday while closing slightly lower. Once again resistance was provided by the short moving average (red line) and the 50% Fib retracement level.

The slightly higher high recorded was enough to confirm the break of the supply line on Thursday and projects to 937.17. TD Resistance is now at 946.21 and the TD Trend Factor target at 944.86. These three numbers give a target zone of 937 – 946.

I think that we need to move above 927.09 today to “activate” the target zone mentioned above. If we can’t break 927.09 I think we will go back down to perfect the pending TD Buy Setup. To do that requires a move below 888.86.

Bottom Line: I am bearish on the equities due to the recent sell signal on the weekly chart and lack of perfection on the daily chart’s DeMark Buy Setup. However I don’t think we will fall hard here … we may end up moving sideways for 2-3 weeks.

Weekly Update for June 28 - A Cautious Bear

Since the weekly TD Sell Setup was perfected on June 5 the market has been undergoing a pullback/consolidation. A technical “sell” signal was given on June 19: Although the RSI (top pane) has confirmed the new price high by making a new high itself, the Composite Index (second from the top) did not confirm. Since the RSI then turned down this is a *confirmed* bearish divergence between the two indicators.

So far we have seen a bearish price flip and a move down to the short moving average over a three week time period. A typical pullback/consolidation runs 1 to 4 price bars after a perfected signal. The question now is whether the rally that began in March will resume. Or will we have a deeper/longer correction due to the added technical sell signal? I favor the latter scenario but note that this week’s price bar is a Doji candlestick where the opening and closing prices are essentially the same. A Doji is a reversal candlestick. In particular, the Doji formed on our price chart is classified as a “dragonfly”.

The following discussion is from the excellent candlestick section of stockcharts.com:

“Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. … Bearish … confirmation is required for both situations.”

One confirming factor to consider is volume. The Dragonfly is a better indicator of a bottom if volume increases; and it did last week – we had the highest volume since May 15 (bottom pane).

So where does this leave us? In my opinion we will only get confirmation that the uptrend has resumed if we can qualify and confirm a break of the current TD Supply line (downward sloping dashed red line on the price chart). For next week the line sits at 951.26.

The buzzing of this week’s Dragonfly has made me a more cautious bear and has caused me to look up. But unless we get confirmation by confirming a break of the supply line I will go back to eating my salmon.