S&P 500 Index (SPX) Chart Analysis
Last week we wrote:
"...Last week we wrote that the stock market was at the most critical level we had seen in many a year. We expected it to quickly resolve in one direction or another, but instead, this four-day pre holiday week had one extreme day after another, and each day was in the opposite direction of the preceding one. That said, the most likely direction in coming days appears now to be to the upside, though placing a bet at this early date would be very risky. If we enter a new trend to the upside, it will last for months."
This week:
After two days of advances and what at first appeared to be a clear breakout for the stock market, the rally fizzled and stocks again declined, giving up half of the early week advances by Friday's close. The S&P 500 Index - SPX declined to short-term support at SPX 1309.
This support ,as well as SPX 1296 just below it, is critical to the rally's survival. A third test of the lows would be potentially very bearish. Third tests have a bad track record.
As we have discussed in previous weekly reports, the second test of the January lows was not what most technical analysts would consider to be a successful one.
When testing lows, there should be no closes below the previous most important low, and that one was on January 22nd. The test of the lows "looks" good on a chart, but it has danger signals built into it. We had several lower "closing" lows plus there was never a definitive rally off the second lows as is typically seen.
Instead we have rallies followed by days of selling on increasing volume. Conflicting signals that indicate both a correction bottom, as well as a failed correction bottom. Of course a failed bottom would mean an entirely new leg down for stocks, something many Elliott Wave theorists are calling for already.
We are still awaiting a clear buy signal, or a clear sell signal. Without either, the risk in both directions is too substantial to take a position.
That said we are closer to a buy signal than to a sell signal and if the late week selling, seen this week, does not continue next week, we could see buy signals generated by this strategy.
To go over the bullish indicators;
We have a double bottom, of sorts, for the stock market. This has occurred in both the S&P and Nasdaq. It may be signaling a new move to the upside in coming weeks.
We have a new "Double Barrel Buy Signal" in place with better than 9 to 1 up volume vs. down volume on two trading days in the past several weeks. This is a strong bullish indicator with an excellent track record. This was discussed in detail in last week's analysis.
The Fed has moved in aggressive fashion to prop up the financial markets in ways not seen since the great depression. They have stated their intention of doing whatever is necessary to keep the economy from entering a recession, to prop up our banking system and credit availability, and even to pumping money into specific financial institutions to keep them solvent.
"Never fight the Fed" is a well-known phrase and certainly the Fed has entered this fray with no holds barred. They are in it to win.
The CBOE Volatility Index - VIX, finally hit numbers that typically occur at market bottoms, reaching the mid-30's in Monday's (March 17th) selling. The following Friday's rally was on higher volume and the across the board 2+ percent gains constitutes a follow-through day, forecasting the likelihood of further highs.
The bearish concerns are;
The Elliott Wave count is forecasting lower lows. The intra-day lows and closing lows for both the SPX and NDX are lower than the Wave C lows (see below charts) and that forecasts a 5-wave sequence to the downside, with waves four and five still to come.
Then there are the substantial sell offs following each of the one-day rallies. We have had several 300 and 400 point rallies and they have all been followed by heavy selling.
Although the SPX, by some measures, is holding above support at SPX 1270, the Nasdaq Composite Index - COMPQ, Nasdaq 100 Index - NDX and Russell 2000 Small Cap Index - RUT have all reached lows below their respective January lows. By this measure, these indexes are all forecasting continued declines ahead. They are also all in bear market territory, with losses exceeding 20%.
The SPX is far below its 200-day moving average and the 50-day moving average has also crossed below it (see red and blue lines in below chart). The average is trending lower too, another bearish indicator. Of course the Nasdaq and Small Cap indexes are also far below these averages. Though a market reversal will eventually occur well below these averages, declining averages can always decline further than anyone expects.
The stock market needs to prove itself to the upside before positions can be entered. Though there are several very good bull market signals in place, each has been compromised, almost immediately, by sell offs that create doubt about their accuracy.
The market "remains" at do-or-die levels. Continued selling early next week could quickly push the SPX and Dow indexes into a bear market, along with the other indexes that are already there.
If we rally from current levels, we could "still" see an explosive advance. The possibility remains in place but time is running out.
Conclusion;
Our outlook is now slightly to the bullish side. The Fed has the power to stop the decline and is exercising it. But we also see the bearish potential. The Fed "could" fail, especially if market participants sense the Fed is running out of options to prop up the economy, or is failing in their efforts.
A bullish signal would likely be generated on a sustained advance. If the advance is going to last, there will be months of gains ahead so please be patient. There is no reason to jump in while risks are so elevated.
At the same time, a decisive close below the lows would likely push the aggressive bull & bear positions into issuing bearish (short) signals.
For those who worry about the financial markets, remember that you do not have to be an aggressive timer to be a profitable timer. Money is made in both aggressive and conservative style trading. Our Conservative S&P Timer is currently in cash, which is not a bad place to be right now. The conservative strategy will also stay in cash longer, but any new advancing "trend" will last a long time and the longer term strategy takes advantage of this.
S&P 500 Index (SPX) Daily Chart
Nasdaq 100 Index (NDX) Chart Analysis
Last week we wrote:
"...The SPX is the driving force at this time and where it goes, the Nasdaq will follow. In previous trends the Nasdaq has usually led the way, but for months now the SPX has been the leader and this will likely continue for the foreseeable future."
This week:
There is actually a strong bullish case setting up for the Nasdaq Composite and especially the Nasdaq 100 Index - NDX.
The NDX clearly broke out above a declining trend resistance line as can be seen in the below chart. That line was tested three distinct times over two months but on Monday, the NDX powered through it.
The NDX remains above that trend resistance line (the line should now act as support) and is now testing short term support levels at NDX 1750. If we hold here, the NDX could be the index that spearheads a new advance.
On the bearish side, the NDX still remains far below its 200-day moving average and has breached the 20% loss level as well, a bear market indicator. The 50-day and 200-day moving averages have also crossed over.
The NDX has closed well below its January lows and thus Elliott Wave Theory is forecasting two more waves, with the fifth wave reaching considerably lower. As long term subscribers know, we do not make trading decisions based on wave analysis as it is too subjective and there are too many variables. But it is also often accurate, and for now it is bearish.
If the market rallies and enters a sustained upswing next week, so will the NDX. However, if the market falls apart next week, the NDX is more likely to suffer faster and larger losses.
Nasdaq 100 Index (NDX), Daily Chart
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