Saturday, August 14, 2010

SP500 Boxed In

The dire predictions continue to proliferate. The WSJ had an article this week titled "Is a Crash Coming? Ten Reasons To Be Cautious." I just listened to Harry Dent calling for Dow 4000 by the end of the year. Robert Prechter is on record calling for wave 3 down. Astrologer Arch Crawford has been calling for the biggest crash since the bear market began, which should have already taken the Dow down below the July low. Everywhere you turn you can find articles and forecasts that are negative on the economy and the markets. Maybe all of these folks will be right, but I doubt it. Did the Wall Street Journal predict the crash in 2008?

Right now the SP500 is boxed in between its 50 month and 200 month emas. In April, it exceeded its 50 month by about 70 points. At the moment the 6, 12 and 26 month emas are converging, and the 26 month is flat. The MACD is moving sideways above its signal line. This is a picture of consolidation. Oftentimes after a period of consolidation, a market will move sharply in one direction or the other. However, it is incorrect to assume that this necessarily means that a new long term trend in the break out direction is likely. Breakouts from consolidations fail as often as not.

I have marked the points where the long term moving averages provided support or resistance over the last 10 years. It is clear that a move below the 400 month ema is not likely any time soon. If we get all the way down there, a rally to the 200 month would be the next most probable outcome. I don't think it will get there, though.

Just for the fun of it, I am going to make a prediction of my own and we will see how well it works out. (Please, this is not something to trade on!) I predict that the SP500 will top on September 8 +/- 2 trading days at 1140 +/- 10 points and bottom on October 27 +/- 2 trading days at 950 +/- 10 points. This would be about 70 points below the 200 month ema. Afterward, it will rally sharply into the end of the year back to its January high at 1150 +/- 10 points.

Currently, the rally is on thin ice, but short term sentiment has become bearish and wave [y] up should be underway.

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