The large cap index just finished its second best weekly point gain ever, but is facing resistance from its 200 day moving average (dma) now.  Although the SPX has made it above the key moving average this fall, it hasn’t closed above it for three consecutive days since July.

One bright spot comes from the bullish break of resistance from the trend line of lower highs.  This past week’s rally took the index above this trend line only to see it use the same line as support the next two days.  The line that was once resistance could (as it often does) turn into support, albeit with a declining trend.  At the same time the line that was ascending support for two months in the form of higher lows now appears to be acting as resistance.  This sets up an expanding wedge where the days’ highs and lows could get wider until a new trend is found.

The 200 dma will have to break resistance before this upper line of resistance can come back into play for more than another day.  To the downside, support could come from the 50 and 100 dma which just converged.  The 50 and 100 dma are actually showing a bullish crossover.  The index tends to be at the cusp of a multi-month trend when these two moving averages cross.  For now this trend favors the bulls which means this past week’s 7+% gain might just be the beginning.  The Williams %R indicator is also favoring the bulls.  At the end of Thanksgiving week the indicator literally ran off the bottom of the chart for its 14 and 28 day periods.  This is an extremely rare occurrence and showed an excessively oversold market.  This aided the bulls when shorts were squeezed out of their positions and were forced to buy back their positions.

If history does not repeat itself and the bears have more fight left in them, the S&P 500 could fall back to its lower ascending trend line of higher lows that started with this year’s low and touches the Thanksgiving week low.  This trend line is the next major line after the moving averages that computer based algorithmic traders will be watching and a break below this could send the index back down closer to the 1,100 area.  If history does repeat and this is the beginning of a new long term uptrend, the bulls will have to be patient before going all in until the October high of 1,292.66 is taken out.  This is the magic line for the computer models and a close above this line should send in mass buy orders over the following days.  That line is almost 4% above Friday’s closing level and leaves a lot of room for day traders to toy with longer term investors before patient bulls are fully rewarded.

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The Dow is almost in no man’s land on its chart.  It’s below its 10, 20, 50, 100 and 200 day moving averages and has decent space before it hits the next support or resistance level.  The one trading channel that could continue to work is the trend line of lower lows and lower highs that started just a couple of weeks ago.  This is a very steep descending channel and won’t last too much longer in its current narrow path.  Its first true test to the downside will be at the 11,000 area.  This area has played speed bump a few times recently and could be ready for another similar move.  Below that, DJIA could make it all of the way down to its multi-month closing low at 10,655.30.

That looks like the direction the index is headed for, but Williams %R shows that it is at absolute oversold levels.  In an extremely rare occurrence, it looks like the line for the 14 and 28 day periods has actually run off the page.  However, the 56 day period hasn’t even made it down to the oversold level yet.  A true wash out should move all three periods to oversold and the buy signal won’t be until they all move out of the oversold area.  This looks like it’s shaping up to be a leveling point that could melt lower a little more while the 56 day period catches up.

It’s hard to want to catch a falling knife right here and start buying, but it might not be a bad place to cover any short positions.  Such extreme oversold conditions are often followed by a quick short squeeze.  Getting neutral before that can be a good way to preserve capital.

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The technical indicators are piling up to create a strong bearish case against the large cap index.  The 200 day moving average (dma) held out as resistance yet again as the market couldn’t push above it for more than a few hours on its second attempt above the line.  On the next test at the moving average the SPX never even made it above it and that’s when the selling ensued.  This failure at the 200 dma came at the same time as the trend line of lower highs maintained its unbreakable resistance.  The always bearish 10/20 dma crossover (not shown) showed up a couple of days later and then the 100 dma broke too.  The break of the 100 dma also came as the trend line of higher lows broke.  This bottom part of the ascending triangle was crucial to hold and when it gave in to start the day on Thursday the bulls couldn’t find a reason to buy even if they wanted to.  The bears were in control officially by then.

Two points of hope are available for the bulls to cling to for now.  The 50 dma hasn’t broken support yet after being tested for the past two days and the longer trend line that was once resistance and is now acting as support has still held.  This trend line is descending and as it melts will fall below the 50 dma.  This will create an opportunity for the latter to fail, but the former to hold for a little while longer.  The 1,200 line is occasionally worth watching, but only because it’s a round number.  Support and resistance only tend to be seen as a speed bump along the way.

Williams %R has given more mixed signals since the summer began than it usually does when viewing the 14 and 28 day periods.  They’ve still been accurate most of the time, but like any indicator, have proven they aren’t perfect.  The 56 day period has been more reliable and is not showing a favorable view for the bulls.  Another day lower within the 56 day period and we’ll see a much stronger choke hold held by the bears as the bulls cower farther out of site.  Volume has been nothing to write home about for either side, but I kept it in the picture for those readers who still like to keep an eye on it.

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(I had to pull the chart for DIA this weekend because TD Ameritrade isn’t pulling up prices for 11/11/11 for me on any indexes.  DIA works and the price action is the same, so that’s what we have today.)

DIA made a very bullish move on Friday when it gapped up above its 200 day moving average (dma) which is currently close to 119.55.  Any gap higher is usually viewed as bullish, but launching above the 200 dma made this one extra sweet, especially after Wednesday and Thursday saw resistance at the very same moving average.  However, this isn’t DIA’s first trip above its 200 dma, so risk isn’t quite off the table yet.  As with most technical indicators, one day does not make it a complete buying decision yet.  It’ll be much more bullish if DIA can retest the 200 dma and then move higher again.  It hasn’t done this since back in June.

Below the 200 dma, support could be found at the 50 or 100 dma, around 114.50 and 116.50 respectfully.  Horizontal trend lines support both of these moving averages and could aid in support if they come back into play soon.  To the upside, DIA still faces resistance at its intraday high of 121.75 from Tuesday and 122.58 from 10/27/11.  Once these break to the upside bulls could be set for another leg to this rally as additional short covering will play its part by then too.  Williams %R gave little head fakes twice recently, but neither instance had a second confirmation day (third day lower) to cause a reason to sell.  Bears could argue that volume was weak on Friday and the rally isn’t worth much, but those who took profits on Friday afternoon would counter the prices still paid out.

With news of Italy’s Berlusconi stepping out of the way this weekend, the markets are poised for another leap higher, but be ready for another test of the 200 dma no matter what.  The bears aren’t going to rollover that easily and the world’s problems aren’t over yet.

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Charts are not only telling when viewed over short periods, but also over longer periods. Investors can use shorter charts to maximize gains and reduce losses week to week, but need to keep an eye on multi-year charts to smooth out intraday volatility and adjust risk accordingly.

In this chart, the 10 and 20 month moving averages (mma) tell the biggest story along with the Williams %R indicator.  The red circles show each time the 10 mma crossed below the 20 mma and triggered a sell signal.  The green circles show when the 10 mma moves back ahead of the 20 mma and triggers a buy signal.  An investor who only paid attention to this single indicator would’ve saved a lot of money by withdrawing risk during the sell cycles.

However, using only one technical indicator can be dangerous.  By adding in the Williams %R indicator a chart watcher would’ve had earlier signals to prepare for the bigger change in sentiment.  The longer red loops show the area where Williams %R began to crack in the 14 month period and followed through all of the way to the 28 and 56 month periods.  This has only happened twice in the past 17 years and both times were at the beginning of massive sell offs.  The green loops show where it was safer to re-enter the market.  The blue loops show where Williams %R has been less exact since the 2009 recovery.  In 2010 only the 14 month indicator issued a sell signal.  The 28 and 56 month signals had not reached overbought yet and their gyrations did not trigger any alarms.  In 2011 the 14 and 28 month indicators issued sell signals, but the 56 month indicator never reached overbought and remained neutral.  All three need to work in unison for a major market cycle to be in place.  That is still not the case.

The trend lines work over longer periods also, just like they do on daily charts.  The $SPX is still within its recent ascending trading channel, even when viewed with two different trend lines of higher lows.  The index is also in the middle of its horizontal support and resistance lines which leaves nearly equal room for upside and downside movement.

When adding these indicators together, the probability leans to the bulls’ side.  The trend lines are somewhat neutral, but the edge goes to the ascending trend line.  The moving averages still show a bullish cycle is under way, but teetering with the $SPX below the 10 mma.  Watching support from the 20 mma and 50 mma could give early insight if another larger correction is starting.  Williams %R gave the warning of a short correction, but without the 56 month indicator being included the chances of another major sell off are limited.  This is not an easy market to watch daily, but the signs are there to remind patient investors to keep an eye on the long term before making short term decisions.



 

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The large cap index has been stuck in a trading channel for two full months now with the extreme top side around 1,230 and the bottom plumbing a new recent low at 1,074.  The majority of the daily prices have traded in a narrower range between 1,200 on the upper limit and 1,120 to the downside.  Active traders have found this an easy range to operate in – sell when it gets closer to the top and buy when it approaches the bottom.  Moving averages and other technical indicators such as Williams %R have not factored in with their usual precision during this period, but that might be changing soon.

A classic pattern for technicians to watch for is a “Head and Shoulders” pattern.  The SPX created just such a pattern over the past two months and could be positioned to react to it.  In a head and shoulders pattern a stock or index has three peaks with the middle one higher than the ones on each side, much like a head is higher than the shoulders that border it.  After the second shoulder fails to reach a new high the next step moves lower in a final wash out before a lasting surge higher.  Not every head and shoulders pattern turns into a new lasting rally so the key is to decide when to add additional exposure.  Most technicians wait for the “neckline” to break.  This line is marked in red in the chart below and is edging close to the 1,200 area.  A breakout above this neckline accompanied with high volume is a screaming buy signal for technicians and tends to signify a new longer leg higher has begun.  Failure at this line can send the stock or index to new lows.

The current chart isn’t completely cut and dry with this approach.  On Friday, the trend line of lower highs (shown in orange below) that started in late July came into play and acted as resistance before the SPX could make it up to the neckline.  This line happened to coincide with the 50 day moving average (dma) which is the only dma that has remained reliable as resistance during the past two months.  After failing at these two points the 10 dma held support at the 1,150 line where previous temporary support and resistance has worked repeatedly over the past 60 days.

Eventually Williams %R and the 10 and 20 dma will regain their predictive powers.  If their time has come it’s worth noting that Williams %R has moved above the oversold area for multiple days consecutively.  Seeing one or two days above the oversold area is not as important as the second and third confirmation days for Williams %R.  This past week saw those confirmation days on the 14 and 28 day periods and is close to it on the 56 day period.  If Monday is a positive day for the S&P 500 then Williams %R could beckon in more buyers.  At the same time the 10 and 20 dma are setting up for a bullish crossover if the index can stay above both of these lines for a few days.  These two indicators could be setting up for bullish signals at the same time the SPX breaks above resistance from the neckline and trend line of lower highs to create a chorus of buy signals.  If any of these fail, then the chances of all of them failing and the market moving lower is fairly high.  Waiting for a clear buy signal is worth missing out on a few points to the upside in case the next big move is lower.

Key Levels:

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The market has been in such a sideways pattern for so long now that some of my favorite technical indicators are not helping much.  If they worked every single time then everyone would use them.  I believe that we’re in a patch that is based almost solely on a sideways trading pattern and most other technical indicators will be moot until we see a break to the upside out of this trench.  I filled the chart below with horizontal lines for the most part.  These lines show the main borders of the trading channels and areas to the top side that have been good selling opportunities and areas on the low side that have offered good buying opportunities.  The downside support levels are now closer than the upside resistance levels which opens the door to investors and traders who can stomach the risk of a potential break in support.

To the upside I included a thin black line that will be a potential key descending trend line to watch.  It marks the intraday highs from four days in this past week and started with the intraday high in late July.  That will be the first test to the upside on the way back to the 11,500 area that has proved tough to vault recently.  To the downside the DJIA is very close to its first area of support.  This is a good test, but not the only one that matters.  The lower line has been tested once so far after the initial August low.  A second test (third time down) could be all the markets need to launch another rally.  More conservative investors would likely want to wait to see if this line in the sand holds again before taking any long positions.  All of us should be ready to sell if that line breaks.

Although the moving averages haven’t been as helpful recently as they usually are, pay attention to the 10 day moving average (dma) and the 20 dma.  Watch for another 10/20 crossover for a bullish signal.  I got caught out by the “head fake” on Tuesday when the Dow peaked its head above both of these moving averages only to retreat soon after in the same day.  The safer trade is to wait for the crossover to happen, not just look like it’s close to happening (like I did).  Ideally this crossover will coincide with the Williams %R indicator breaking above oversold for at least three days.  I preach this all of the time and yet I went bullish during the second day higher.  Had I waited like a smart trader I’d have save some money.  There’s nothing like another few thousand dollar lesson to help you remember the next time around.  For now, the Williams %R indicator isn’t telling us anything as it treads through no-man’s land.

Stay nimble.  The market is likely to break out to either side during Q4.  The chances of staying within this trading channel are very slim for another three months.

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The short term trend lines of higher lows and lower highs are on a slow path to converge.  This shows volatility decreasing and supports the based building theory.  The longer descending trend line of lower highs that started in late July finally broke last week.  This illustrates the worst of the steep decline could be over, although the DJIA could follow this line lower as a trend line of lower lows.  That doesn’t seem as likely based on the Williams %R indicator.  The second week of August showed a “head fake” in Williams %R as it cleared the oversold area and had multiple confirmation days which I always like, but the ascent wasn’t steep enough to get us to fall for it.  This past week looks different though.  %R on the 14 day indicator has moved higher sharply and had three confirmation days to follow.  The 28 day indicator can’t seem to agree with it though.  It’s higher, but not with such vigor yet.  It might need the 10/20 dma bullish crossover to make it shoot higher.

The chart shows a clear attempt by the Dow to push higher, but its legs are still wobbly.  It might be a time to test the waters with some smaller positions and be ready to jump in deeper when the shorter trend line of lower highs breaks (around 11,400) or dump what you have left in a mad dash for the exits if the August 9th low breaks.  For the lower end, we’ll have a good warning signal if the lower trend line of higher lows breaks (around 10,930).  Stay nimble and ready to react.  The fun isn’t over yet.

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The next real key test for the large cap index is if it will hold support at the low from earlier in the month.  If this intraday low of 1,101.54 doesn’t hold the next stop might be closer to 1,000.  That gives about 2% of easy downside risk before expected support should surface.  If this line (in red below) doesn’t hold it could mean another 10% lower from current levels.  A fall below that is very unlikely based on valuation and the fact that this fall would be close to the average bear market decline.  Before the bears take the index that low I’ll buy some inverse index ETFs to try to profit from the trip lower.  I won’t be buying those ETFs until I see 1,101 break though.  I thought about trying to buy one or two of these inverse funds to catch the next 2% lower, but don’t see much benefit for the risk of a snap higher.

The Williams %R indicator doesn’t give much help in predicting support either.  Markets can stay oversold for months.  Williams %R is just continuing to confirm its sell signal from mid-July.  Once the market bottoms, this indicator will turn higher.  It won’t catch the bottom, but will let us get in for most of the ride higher.

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