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Market Analysis: $SPX 9-16-12

In the crazy euphoria that is this market, I thought it might be prudent to look at the $SPX on a longer term timeframe to see where we are in the bigger scheme of things. The chart below is a monthly chart zoomed out for 17 years and clearly shows the potential for triple matching tops @ 1552ish - the same setup as the drops in 2000 & 2008.

One thought is that we could be forming a head and shoulders which would enable a pause to refresh, and let in all of those money managers who are still under invested. I've done some back of the envelope math and applied it to the hourly chart below.

On the hourly chart, the stochastic has already given a sell signal, and the high candle @ 1474.51 has a top wick followed by a clear decline of little red candles and the MACD is stairstepping down. We see patterns start on the lower timeframes before the upper timeframes, so if this is correct, the decline has already started. I would add that at the time of writing this, the S&P futures are off 12 points from their highs. Also interesting is that the VIX closed up +.46 or +3.27% on Friday. SDS and SDOW also held their prices which indicates there are some other folks out there recognizing that we are so far extended above the 200ema. A full resolution of the head and shoulders pattern puts us smack back to 1400.

My takeaway from these charts is that we will likely have a pullback around 3% before we attempt another rise. My maximum target on the $SPX is 1552. If the pullback remains shallow this would mean we have upside of 120 S&P points (based on a pullback on 3%). You might think I'm crazy with that +120 on the SPX, but considering we are +59 on the monthly chart right now we could be there in the last 3 months of the year.

The facts that we have going into tomorrow are that the chart is extremely overbought and the candle is outside of the bollinger bands. Because 90% of all of the price action is contained within the bollinger bands, there is a strong possibility that the price reverts to the mean, or back inside the bollinger bands. Once this happens we will have a better feel if we are truly going into the head and shoulders.

Another possibility is that we are making a bull flag, and are lacking the pennant stage.

Regardless, my first downside number is still 1430-1435 - if that does not hold we will go to the next ledge of support which is 1423 (the 20ema), then 1400 where the long consolidation will offer a nice base from which to spring back higher from.

I'm in the buy the correction camp - that does not mean all at once - it appears to me that we might have 3 legs down so I would stagger my purchases in 1/3rds. This correction will be an option writers dream and I will look to collect premium by selling puts, and using these put sales to get assigned a stock at my preferred price.

Glad to be back in the saddle....



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.