One Last Shake

The market rarely fail to shake out the weak before it moves higher. Today the SP500 went down double digit to shake out the weak before it rally back toward positive territory in late afternoon trading, and closed at 1187.76(down 1.64 points.)

In the SP500 daily chart below, it shows how the intraday broke below the 50 SMA to spook those traders that were looking for support from the 50 SMA. After it broke and shake out those traders, the SP500 reversed and printed a doji hammer candle with a long shadow along with the low holding above the previous low of 1173 by $0.64 (subtle?). This could be the last shake out before the year-end rally get started. Happy holidays!

SP500:

Gathering Momentum

After spending couple weeks consolidating, the market is gathering momentum for a year-end rally. The SP500, Nasdaq 100 and the DJIA all held support near or above their 50 SMA and built a nice small base. When the year-end rally kicks in, the major market indices will likely break above their recent high.

Here are the charts for the market indices:

SP500:



Nasdaq 100:



DJIA:

Entered The Pull Back Zone

The SP500 has experienced four consecutive down days, and today it has entered the pull back zone between 1600 and 1800. The critical level for the SP500 and other major market indices in the near term will be their 50 SMA. If the SP500 does not find support near its 50 SMA, then there is a high probability it will retrace back to the 1125 to 1130 level (which is also near its 200 SMA).

The financial EFT, XLF has penetrated its 50 SMA intraday today, and the technology ETF, XLK is closing in on its 50 SMA. If the financial and the technology sector unable to find support near their 50 SMA, then most likely the SP500 will decline to the 1125-1130 to test for support.

One positive catalyst for the market this week is GM’s IPO. From the latest indication, the pricing of GM IPO will be above the initial price of 26-29 due to high demand for the shares. The debut of this IPO could provide some positive sentiments to the market on Thursday.

Although the SP500 is down more than 19 points or 1.6% today, but things appear to be stabilizing and/or turning around near the close. I will not be surprise to see some sort of short term oversold rally tomorrow. As far as trading goes, I will remain patient and wait until support has been established for this pull back before opening any new long positions. In the meantime, I will continue to do quick trades with reduced size (no holding period of more than 2 days).

SP500:



XLK:




XLF:

1st Round Goes To Fibonacci

It appears the SP500 has found resistance at the 61.8% Fibonacci retracement level, and the first round goes to the Fibonacci traders while the pattern traders have to wait for their Head & Shoulder measured move to materialize.

Prior to the Fed's QE2 announcement, the tech sector has been leading the market up and the financial was in dormant. After the Fed announced its QE2 plan, the financial woke up and moved some of the skeptics into the market and this surge have triggered some profit taking. Since next week being an OpEx (option expiration) week, further shakeout with increasing volatility can be expected.

The market has not given any sign of a top, and the likely support from this pullback will be near the 50 SMA level (see the charts below). Until a support level has been established, buying the dip (bottom fishing) can be a risky move. I will be keeping a close watch on the 50 SMA for clues on whether the market will be resuming its rise or more pullbacks to come.



SP500:



XLF:




XLK:

The Chase Is On

After the conclusion of the U.S. midterm election, the Fed’s QE2 announcement, and the U.S. Job Report, the market continue to surge higher with the SP500 hitting the 1220 target level.

From the recent price actions, one can detect there are traders chasing after rising equity prices. Although there are no signs of a market top, but the SP500 is approaching an important inflection point near the 1230-1250 level.

The following SP500 price charts illustrate how the 1230-1250 inflection level was derived. In the first SP500 weekly price chart, it illustrates how the inverted head & shoulder pattern formed between 10/08 - 7/09 gave a measured move of approximate 1250. The second SP500 weekly price chart shows the 61.8% Fib retracement between the 2007 high to 2009 low place it at 1228.74. The significance of these levels is purely technical and these levels have the potential to be resistance and could potentially be reversal level. If the SP500 can hold above the 61.8% Fib retracement level, there is a high probability that it will retrace back to the 100% level, which will place the SP500 back to the high of 2007.

I will not be surprise to see the SP500 reach the 1250 level before it consolidates. The reason is 1250 level have been mentioned by different talking heads as the high for the SP500 in 2010 or the SP500 will end 2010 at 1250. Since the 1230-1250 is in sight for the SP500 to hit, probability favor it will be hit.