S&P 500: Bears still in control
July 12, 2009The past week ended with another small decline in the S&P 500 index, confirming the bearish tone that is currently predominant. In contrast, bonds were again rallying after having retraced some of their gains on Thursday.
General conditions still favour falling equity prices, if traditional technical analysis methods are applied: the S&P 500 is currently trading below its 50 and 200 day simple moving average. Financials, that have been very strong during the rally from the March lows are showing relative weakness compared to the S&P. XLF, the financial select sectors ETF, declined another 1.33 per cent on Friday, closing the week at a loss of 3.23 per cent.
If asked how far the current d+ecline in stock prices may go, we can only say: we cannot possibly say. As you might already know, Crossroads FX uses an approach that bases short- and intermediate term trade decisions on the actual behaviour of prices, not on fundamental aspects. So we will rarely ask for any reasons "why" a certain price behaviour persists. Accordingly, we developed a proprietary indicator that identifies the line of least resistance both to the downside and to the upside, and prints them on the chart as a green line (buy line) and a red line (sell line).
You can see on the following charts that if the price trades for 2 consecutive bars above the green line, rising prices are to be expected. Once the price trades for 2 bars below the red line, you should prepare for falling prices. Within an established downtrend, the green line also acts as resistance. This could be seen as prices were rejected when trading in the high 920s lately.
Using this method, a sell signal on the S&P 500 was generated on 6/18/09 as you can see on the following 480 min chart:
There is no compelling reason to become a stock market bull again unless prices trade above 916.55 for 2 consecutive bars. The line of least resistance remains to the downside:
The shorter term 10.000 Tick chart is still bearish as well. It shows that the recent sideways action in prices has not yet done any damage to the current downtrend, as prices did not trade above the green buy line for two consecutive bars.
However, on the lesser timeframe, the current downtrend would be in danger if prices would trade above 884.63 for two consecutive bars. Of course, this would only have the consequence that a somewhat neutral picture would emerge, as the downtrend persisting in the bigger timeframe would remain bearish:
The shorter timeframe chart also offers information about the current sell-line, that is currently at 865.64. If prices should trade lower than this level, then the bear-trend should accelerate to the downside, as the bigger timeframe is currently on a sell signal. Whenever the line of least resistance for prices is showing in the same direction on different timeframes, the magnitude of those moves is intensified.
Let us take finally a look at the recent price action on US treasury bonds. Bonds often - but not always - trade in an inverse relationship to the stock market as they are perceived (especially in shorter term maturities) as a safe haven.
The prices of the 30 year US treasury bond are showing a relentless uptrend on the following 180min chart, with very little reason to be bearish currently. In fact, prices have to trade below the red sell line (currently at 118'13) for two consecutive bars for turning the longer term chart bearish again:
On the shorter time frame however, it would not take so much of a move lower to turn the chart bearish, as you can observe on the following 3666 Tick chart. There, prices would have to trade below 119'08 for two consecutive bars to make the chart looking bearish again.
As a conclusion, the S&P 500 remains in its current downtrend, with bears in control. Bears have reason to remain very confident as long as prices trade below 884.5, but should consider running for cover if prices trade above 916.55. The 30 year Treasury Bond is still showing a bullish chart, where prices remain in their established intermediate term uptrend as long as staying above 118'13.
If you have any questions, please do not hesitate to contact us by writing an email to
Disclaimer: This analysis is solely the opinion of Crossroads FX and its authors, and does not constitute investment advice. Opinions expressed should not be construed as recommendations to buy or sell stocks, bonds, futures and/or options or other derivatives. A qualified investment advisor licenced by the appropriate regulatory agencies of your jurisdiction should be consulted prior to the purchase or sale of any investment.
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