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Likely Market Direction For The Coming Weeks And Q4

The following is an abridged version for those seeking a quick overview. For details see the same titled post at

As we noted in prior days, we did not believe the bellwether S&P 500 would get past the 1100 -1160 zone unless there was some amazingly good news, given the technical resistance it had to cross. As shown on the chart below, this 5 layered resistance included:

1. Upper Bollinger band at 1123

2. 61.8% Fibonacci retracement level at 1116.32

3. 50 day moving average at 1110

4. 200 day moving average at 1103

5. Psychologically important 1100 price level

Recent concerns about the Yuan revaluation, EU banks and US housing didn’t even let the index get past the upper Bollinger Band at 1123. No matter, the ranges are only approximations.

Ominously, the bellwether S&P 500’s close at 1092.04 yesterday left it in a deteriorating technical position that suggests more downside for risk assets in general.

Here’s the chart:


Deteriorating Simple Technical Picture

Beyond the obviously new lower high, here are some simple technical concerns.

As we’ve noted in the past, once the S&P 500 retreats from its’ upper Bollinger Band for 2 straight days, it tends to at least test to support of its 50 day moving average when the index is in an overall medium term uptrend. That is no longer the case. Since the beginning of the year, these retreats from the upper Bollinger band have lead to the S&P falling through its 50 DMA all the way to its lower Bollinger Band. In both previous cases seen this year, the index spent extended periods at or near this lower band. Currently the lower Bollinger Band is around 1046, so that’s our near term target for the index. So with the S&P 500 currently around 1087, we still have at least another 40 points. That’s a 3.4 % further drop. So unless we get come unexpectedly good news, expect a similar decline in most other risk assets within the coming weeks, and a possibly bigger drop in the more volatile ones like crude oil.

But there’s more going on here.

Yesterday’s close puts the bellwether S&P 500 further below its 50 DMA. Since the start of this year (which has coincided closely with the Dubai debt crisis in late November and start of the EU debt crisis as a market focus) each time the S&P 500 has gone below its 50 DMA it has declined for 2-3 weeks, and stayed below it for 4-5 weeks. The last time it managed to close above its 50 day moving average on June 15, the index only managed to stay above it for 4 sessions, vs. almost 9 weeks when it broke above its 50 DMA in mid-February.

What was the fundamental difference behind the move? Obviously the EU debt crisis was the prime mover, as attempts in late March and April by the EU to calm markets, first with inadequate aid packages and then the latest ‘shock and awwwww’ EU/EMF plan of nearly € 1 bln, failed to convince markets that the EU had done anything other than delay a Greece default that would likely shut other weak economies out of credit markets and ultimately lead to a wave of sovereign defaults.

Yesterday’s close also caused the 50 DMA to again begin pointing down towards a crossing beneath the 200 DMA. Once that happens it’s called a ‘death cross’ and like suggests a more long lasting down trend ahead. We’ve already seen death crosses form on the Shanghai index (which has tended to lead the S&P 500 over the past years, suggesting the same awaits the S&P 500), EURUSD, and crude oil. Since these formed their death crosses, they have remained in multi-week downtrends (though as of today the Shanghai index may be bottoming, even if it is not showing signs of moving higher).

In short, barring any major news positive or negative that changes sentiment, the likelihood is for another roughly 3.4% drop in risk assets in the coming weeks.

What’s beyond that? Even bearish market heavyweights like Charles Nenner and Bill King, among others, concede the chance for some upward movement into late summer early fall. After that they foresee a nasty autumn and beyond. See this section on US stocks in FOREX, COMMODITIES, STOCKS OUTLOOK June 23rd: News, Analysis Trades 10:30 GMT for details. See also Three Powerful Bearish Signs: S+P 500 Heading To Around 830, Short Risk Assets for our thoughts on where risk assets are heading into Q4 2010 any why.

Next Likely Market Moving News?

See the full article referenced above.

Stay Alert For The Pain From Spain

Of course, there are plenty of other ticking bombs under the risk asset markets beyond the EU.

See the full article referenced above.

Disclosure, no positions