If you asked me yesterday what I thought of equity markets I probably would have said that I am uncertain and am waiting for something to jump out at me. After today I think that I would be able to see what’s going on in the dark with sunglasses on.
In April the high point of the rally was 1220 which is a level that we gapped up above on Nov 4th, the day after QE II was announced. After November 4th we moved higher and found resistance at 1226 before retracing lower for several days. Today we had positive news regarding GM’s IPO, news of an Irish bailout, and news that the Philly Fed would save the day. We’ve regained most of yesterday’s losses but have found resistance at 1200 even.
At the end of April, we gapped up above 1200, then found the resistance at 1220 before coming back down and hovering around the 1200 level which is where we are now. Immediately following was the Greece Debt Crisis, and the flash crash. It appears we are repeating ourselves here.
Unable to break above 1200.
Two other technical indicators here are the bearish divergence that extended for over 2 months and led into the QE gap, and the oversold indicator on the stochastic. I believe that we were oversold in the extreme near term due to the price volatility and I think that yesterday and today are a dead cat bounce before the selloff considering how the market has not been able to eclipse 1200 despite gapping higher on all of the good news.
The bearish divergence is a big one and it ends right before QE II. I think that when it ended, the market has allowed the trading to continue higher as a setup. I don’t expect us to get past 1200 and I think that the problems in Ireland will worsen despite the “bailout” talk. Remember, Greece was saying the same things as Ireland is now right before we peaked in May.