The S&P 500 Is out of the Box

The squiggly lines now favor the bulls... the last 10-15 minute markup on Friday is quickly forgotten and now just looks like a bullish development on the charts. Add together today's gap up and technical analysts across the land are giddy.

We mentioned the box we've been stuck in late last week [May 28, 2009: S&P 500 Remains Range Bound for a Month] This was Thursday morning and we hit S&P 888 (20 day moving average) and bounced... now after the Friday "push" in the last 10 minutes plus today's move, we are already over S&P 940. (that's +6% since Thursday morning for those counting at home) As I wrote in that piece:

For bulls, as long as we remain over key moving averages this consolidation period after a huge move is healthy.

For bears, the fact we are making lower highs (May 8th, May 20th, yesterday) could be a positive to their case,

So obviously the bulls won. Here was how the chart looked:

Now I am going to show 2 charts because I am hearing a lot of talk about how we cleared the 200 day moving average (incredibly important) on the S&P. I tend to talk in exponential moving average language but many people use simple moving average. (just two different methodologies chartists use). Usually there is not a world of difference, but right now there is about a 20 point difference on the 200 day moving average.

Using simple moving average we cleared S&P 930 (which was also the top of the box) and are off to the races

Using exponential moving average we still have a bit more to go, but at this rate it can be cleared by the end of the day

In normal markets you'd expect an average to have a lot of trouble breaking right through such a significant resistance lines. After what I've been seeing the past few months, and reinforced by the magic that happened in the last 10 minutes Friday... we are not in normal times. It is very rare we either move down or up through the 200 day moving average... so slicing it through like this (if you use simple moving averages) without any sweat is quite different to say the least.

Either way - being cautious has been wrong as judged by the market. Once again, I'd normally say at this point the "reflation" trade is getting mighty long in the tooth, parabolic, and crowded. But greed has replaced fear and with the gusts of winds provided by billions of futures orders at all the right spots, it is impossible right now to make a concentrated stand against the market - even in parabolic sectors. So all one can do is play along. The question all these underinvested hedge funds (and myself) have to ask is do you just throw everything to the wind and "chase" knowing how far the mob can go.

Something to think about for the longer run... markets go back to retest previous lows or at least make an attempt to do so (they don't necessarily make it all the way back). My assumption has been the past few months that potentially S&P 666 could be the ultimate low, especially with the money printing going on to support all assets classes; but something in the S&P 740-750 range would create a test (and a successful one) by creating a higher low.

So the farther we get away from that, the more pronounced an eventual retest will be. That said, this is historically how it works... I suppose with the multi billionaire "investor" who loves to buy futures maybe historical will become useless. We'll see later in the year.

Parabolic? I guess not...

Comments

[RiskReturnO...:]

740-750 on SPY would be great pullback to set up a reverse head and shoulder formation, so that for once and for all, we can move up and not look back. The question is what to do now @ 940 ... seems like the "money on the sideline" argument is winning, and people are buying blindly on any 2-3% dip .... what catalyst do you see to take the market from 940 to 740 (20% drop!) ... this would indeed be great as the final capitulation!

Jun 01 04:44 PM

[Stone Fox C...:]

Markets don't always retest and the more people that expect a retest the more likely it wont happen. The push of the market below 800 was an incredibly bleak time period. How in the heck could we get back to that level? We would need complete new industries to collapse. Just don't see any sort of retest happening at this point.

Jun 01 04:54 PM

[PastTense:]

I think we can get back to that level (below 800) if the bad economic news continues. Other than the rise of the stock market there simply hasn't been much good economic news.

Jun 01 05:10 PM

[ManAboutDallas:]

This has been the best butter-the-chumps rally since May-June of 1981. But that was like, sooooooo 20th century, man.

Jun 01 06:21 PM

[squark62:]

that's what everyone said about march-17-2008 right when bear stearns blew up. took six months and the rats were jumping off the ship. the higher the market goes up here, the greater the chances of a oct-2008 scenario repeating in the later half of 2009. i hope the market doesn't crash but folks have very short memories in the U.S.


On Jun 01 04:54 PM Stone Fox Capital wrote:

> Markets don't always retest

Jun 01 11:28 PM