Another Prolonged Bear Phase Ahead? Not So Clear

Last week's indicator review found that we were trading in a broad trading range, with further weakness likely. We did indeed see that weakness late in the holiday-shortened weak, as the S&P 500 sectors turned bearish and 20-day new lows once again jumped ahead of new highs. With downside momentum strong, further price weakness can be expected this coming week, which would have us testing the June price lows at the low end of the market's extended trading range.

Click to enlarge:

Interestingly, our cumulative Demand/Supply Index (top chart) is only near its zero level, indicating that we are not yet at intermediate-term oversold levels. Similarly, 65-day highs continue to outnumber 65-day lows (middle chart) and remain stronger than at the June lows.

One reason that the indicators have held up reasonably well into the recent weakness can be seen in the advance-decline line for NYSE common stocks only, a very useful chart posted by Decision Point. We remain well off the June lows for the A/D line, raising the interesting possibility of a non-confirmation should we dip below the June price lows in the major averages.

Quite a few market participants are focusing on the seeming head-and-shoulders pattern in the S&P 500 Index since May's highs. A break of the May/June neckline would no doubt bring sellers to the fore. It's at that point that we would see if this is more than a shallow correction of the strength we've seen in stocks since March. From the state of the indicators at present, it's not clear to me that we're about to enter a prolonged bear phase.

Comments

[TurtleTrader72:]

If we were to use some gap trading strategies, we should see the NASDAQ fall to around 1550 and the S&P 500 to around 815 where these indexes left some 'unfilled' up gaps during their bull run. Up gaps are visual representations of excessive trading practices and almost always get filled at some point in time. Coincidently, these gap levels also correspond to the 50% retracement level on fibanocci retracement studies. Even the first fibonnaci retracement level of 38.2% sits at 845 for the S&P 500 which is significantly lower than its current level. Futhermore, the VIX is starting to indicate an incrasing level of fear in the market as investors are starting to purchase additional put options to protect existing long positions and/or profit from a potential downtrun. Although there are no guarantees, the combination of these three technical points support the idea that this correction could take stocks much lower than where they are today.

Jul 06 11:43 AM

[Maxe Paul:]

I would concur with your thoughts. Although there is a small risk that the extended bear market has reamerged, i expect the market to bounce off levels around 815 or 845 also, then leading to a bear market rally climax of around 1050/1100 in the month ofSeptember.


On Jul 06 11:43 AM TurtleTrader72 wrote:

> If we were to use some gap trading strategies, we should see the
> NASDAQ fall to around 1550 and the S&P 500 to around 815 where
> these indexes left some 'unfilled' up gaps during their bull run.
> Up gaps are visual representations of excessive trading practices
> and almost always get filled at some point in time. Coincidently,
> these gap levels also correspond to the 50% retracement level on
> fibanocci retracement studies. Even the first fibonnaci retracement
> level of 38.2% sits at 845 for the S&P 500 which is significantly
> lower than its current level. Futhermore, the VIX is starting to
> indicate an incrasing level of fear in the market as investors are
> starting to purchase additional put options to protect existing long
> positions and/or profit from a potential downtrun. Although there
> are no guarantees, the combination of these three technical points
> support the idea that this correction could take stocks much lower
> than where they are today.

Jul 06 12:04 PM

[TurtleTrader72:]

I agree...I believe that this correction could be the process in which we form the second shoulder of a intermediate term inverse head and shoulder formation. If that is the case, i would look to be a buyer at around the 800 level on the S&P 500. From there (if my theory is correct) we could experience a rally that could take the index from about 800 all the way to 1100. I base the 1100 mark by using a 'gap trading' strategy where i would expect the 'down gap' (in the weekly bar charts) on SPY to get filled in at that level. If we use a 'relative strength theory' it will be technology shares that will likely lead the next intermediate bull run. In the meantime, lets see if the latest weakness in the market will provide us with the second shoulder formation i am looking for.


On Jul 06 12:04 PM Maxe Paul wrote:

> I would concur with your thoughts. Although there is a small risk
> that the extended bear market has reamerged, i expect the market
> to bounce off levels around 815 or 845 also, then leading to a bear
> market rally climax of around 1050/1100 in the month ofSeptember.
>

Jul 06 12:24 PM

[Fighting Yoda:]

All the good news (green shoots etc) are already priced in, but what we are getting is only bad news - if earnings are bad- that would be the last straw- we would see a major leg down.

Jul 06 08:20 PM

[Michael Clark:]

I can see the head-and-shoulders pattern developing. I've developed a long-term momentum indicator (M5) which gives an early-warning-system reading that shows the S&P 500 Index has lost momentum. My view of this is that the shoulder line will break and the index will head down toward the next support level, 790.88. the decline may also test the March low -- but I'd expect a test of 790.88 at least.

The chart is here:
home.mindspring.com/~mclark7/GSPC_D%20760...

Jul 07 02:50 AM