Suspicious

The market ended the week showing some strength and the SP500 closed above the 1100 mark. The SP500 broke above the downward trendline and it is attempting to form a higher low/higher high pattern to reverse its trend. But until the SP500 can break above the 1131 level, I will be suspicious of any rally inside of 1040-1100. I still believe the current market environment is for short term traders, and I will continue to be cautious.

Little Help From Uncle Sam

The market sold off on Friday with the DJI down 261 points, SP500 loss nearly 32 points, and the Nasdaq 100 gave up more than 52 points. This came after a strong rally toward the close on Thursday’s trading session that resulted in wiping out more than 100 points of losses and ended with a small gain. But looking back at the last two weeks price actions, the market did what it set out to do; squeeze the bears and trap the bulls (with a little help from Uncle Sam near the close on Thursday.)

The following SP500 price chart illustrates how the dynamic of the market punishes the latecomers and the ill informed. Here’s how it played out as I interpret it: 1) SP500 start the oversold rally back to test the 1040 level after the 4th of July break. It reversed after it has reached the 1042.5, this gave the late bears confidence to go short with the believe that the market will head lower after it has recently broke the widely watched head & shoulder pattern. Of course, those that have shorted the market when it was above 1100 have covered as it bounced up to test the 1040 resistance. 2) On the following day after the 1040 reversal, the market rallied and the SP500 gained over 30 points. This rally trapped the late bears.



3) As this oversold rally continues and it has reached the resistance of downtrend price channel and the 50 SMA, those trapped bears are being squeezed and the lure is set to sucker those anxious bulls. 4) As distribution starts, the SEC put out words near Thursday close that a ‘significant announcement’ will be made at 4:45PM ET. And the people in the know (there are always people in the know) started rallying GS, and the market buzz is that GS has settled with the SEC on the fraud charges. This gave the early money a gift on exiting their long positions without putting pressure on the price as the last bunch of anxious bulls are being suck in with the help of Uncle Sam. This near the close rally helped the market to recover its losses and closed with a small gain. 5) The trap is set and snapped. Now those trapped anxious bulls will be hoping all the way down to 1040 for a bounce back up above the 1100. From the way things are looking in the price action, the market will cause the hopes from these trapped bulls to die in vain.

The near term support will likely be 1040 and the downside target remains to be in the 870 area. I remain to be bearish until the SP500 has shown it can break above 1125/1130 with convictions and breaking the lower high/lower low pattern.

Short Term Rally

After the 4th of July break, the market rallied and the SP500 moved back above the 1040 level. This rally came as no surprise after the SP500 has been down nine out of the last ten sessions and falling from 1117.51 to 1022.58 on a closing basis. The market was telling us a short term rally was coming as technical divergences started to appear. This rally will probably encounter resistance near the 1090 level or the 50 SMA near the 1100, and it will squeeze out those late bears and trap the early bulls when it resumes its downtrend.

Next week earnings report will start once again, it is also options expiration week, and these things will definitely create some volatility for the market. In this earnings reporting period, the market will most likely be keying in on the forward looking projection and not too much on the actual earnings (unless it is short of projection.) As more companies give cautious and less optimistic forward looking projections, the debate on the possibility of a double-dip recession will be elevated. I believe the market will continue to be pressured until either the double-dip becomes a reality or there are signs of a sustainable economic recovery.

Here is the updated SP500 chart. A downtrend price channel could be forming after the failure on the widely watched head & shoulder pattern. Until the market breaks the lower high/lower low pattern, I will remain bearish.

Faltering

The SP500 broke below the widely watched 1040 level last week. Talks are beginning to surface once again about a potential double dip US recession. The dismal job creation number clearly indicating the US economy is not recovering as many people were betting on. Until some clear signs on where the US economy is heading, the market will continue to falter.

In June, the market was watching the Euro-zone. Now, the focus is on China. Lot of people was betting on China's growth to bail out the global recession, especially US. However, one cannot overlook China's growth is depended on the growth of the US economy. Since China has not developed a large middle-class to become an internal consumption economy. Therefore, if the US economic recovery falters, China's growth will be limited.

Here is the latest daily price chart for the SP500:




The measured move from the break of the 1040 baseline (head & shoulder pattern) put up a likely downside target near 870. There are technical divergences that indicate a potential oversold rally could occur in the near term. Any near term rally is a good opportunity to exit longs and establish new short positions.