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Where do we go from here?

As I fought off the crippling effects of tryptophan poisoning this weekend, some brief moments of lucidity gave me opportunity to look at some charts.  What I saw inspired me to get out the crayons and make some annotations.

As the ancient Chinese proverb goes, “may you live in interesting times.”  Indeed we do.  There are currently some significant contradictory signals within the world of technical analysis, and some pretty attention-getting headlines as well.  There are plenty of ominous headlines:  “S.Korea’s Lee: North to ‘pay price’ for attack“, “Saudi king urged US to attack Iran: leaked documents“; but then there is also encouraging news: “EU agrees on $89 billion bailout loan for Ireland“, and “Black Friday: More shoppers, modest sales“.

I think the only reasonable response by traders is to look at the charts, for all the news/sentiment/seasonality/astrology/etc is contained in the movement of the price.  In the end, it doesn’t truly matter why the price moved — all that matters is what movement occurred and what is likely from here.  I spent some time cuddled up to the S&P 500 chart, and my notes are summarized in the picture embedded in this post.  I thought it was especially interesting to take a step back from the daily chart to see the forest for all the trees in the weekly.  Three observations I thought worthy of mention:

  1. Until the wheels came off the bus in Aug/Sep/Oct 2008, a support level was established in the 1200 – 1225 range.  Then the bottom dropped out.
  2. The markets digested a lot of bad news between Sept 2008 and Sept 2009 (and the bears had a massive party).
  3. Support has been established over the last year at around 1010 to 1045, with resistance near 1220 as we bump up into the previous 2008 support levels (which is where we happen to be now).

So — what now?  Based on the current readings of market breadth and bullish percents, with a clear uptrend in place: I think it’s very risky to short the market here. The “Minority Report” in favor of a bearish stance right now is the McClellan Oscillator (posted to the right), which did move to a sell signal recently.  Note that market breadth and bullish percents could swing quickly to show supply back in control, and that would change this non-bearish opinion rapidly. Even then, I would hesitate to short the market aggressively until the support at 1010 had fallen.

The least risk, of course, is to sit in cash/bonds and wait for a clear opportunity to strike.  (But that carries lots of opportunity risk…) I think with the market sitting on it’s 200 day moving average, plus market breadth and bullish percents showing buyers in control, there’s a lot of reason to suspect a healthy bounce higher this week.

Of course, it’s equally likely that Wall Street suffered the same tryptophan hangover I had.  Then it might be 2011 before we see any real movement bullish or bearish!

Disclosure: Long S&P 500 at time of writing.