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Market Posture SPX

August 3, 2008
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The end of a month always seems like a good time for very long term viewing. Here’s a long term look at the SPX from back in the 70’s. Pretty interesting that after putting in an equal major high it retraced almost perfectly to the 23.6% fib. level. Beside the potential double top formation, the index has also broken a support line from the lows in ’82. It’s not necessarily a very well defined line, but if we include the recent bounce from it before breaking it, there were three touches before it failed.

(Click image to see it larger)

Even though we’re clearly in a bearish environment with downtrend on the intermediate term and the long term, a “bear rally” would be quite in keeping with this channel on the 5 year chart to the right. 1325-1350 seems a reasonable target

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Despite congestion between 1400 and 1275 from January through April, the market slid right through and past that whole area in June and into July. This leads me to believe that if the SPX gets above the resistance of the past two weeks, solidifying a short term uptrend, we may well move fairly quickly to around 1325 or even 1350, which are also right around the 50% and 61.8% retracement levels from the May high.

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I tend to focus on the green line of the Market Forecast since it is the Intermediate term line. It is important, however, to realize that it does seem much more responsive to the daily fluctuation of the index, so it actually looks more along the lines of a 30 day MA or so. Arguably, this represents a shorter view than what we think of as Intermediate term. But if we use the sentiment line to shade our reading of the green line, it should be okay. Most importantly, the intermediate term reading of the SPX trend itself will hold the highest weight. In any case, the intermediate term line seems headed upward (higher low), even if the direction is less convincing then when it broke out of the lower reversal zone. It is also still below the 50 line, the level which can be seen as an important shift in strength. The Sentiment line is clearly headed lower and almost into the lower reversal zone. All together, I’ll read it as neutral and lean more bullish as the green line heads more decidedly upward.

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The VIX is right in the middle of the range for the last year between 16 and 31, which is not particularly helpful with respect to a longer term signal. However, it seemed a significant enough bullish signal when the steady upward channel from May to July was broken to the down side. For me, this was good enough for at least a short term buy signal. “When the VIX is high and turns lower, time to buy.”

But just as the SPX has hit resistance in the past two weeks, the VIX has hit support at 21. On the top side, the 24 level has shown a certain significance over the last year a number of times. So for the moment, I’ll look at this as Neutral, as we discussed on the Webex meeting last week, and look for a break of 21 or 24 as a trigger and directional indicator.

To sum it up, here’s how I see it:

Fairly neutral. We could have in the near future a clear signal potential from the VIX to either the upside and the downside, and the SPX has a pretty clear resistance level to break for a confirmed short term uptrend. If the recent higher low, 1235, is broken to the downside, all bets are off for the bullish argument.

In the meantime, this would be a good time to look at the groups showing relative strength and relative weakness for long and short ideas going forward.

Have a great week!

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