Friday, August 5, 2011

Market Watch:SPX

Well, back when the SPX closed right on it's 200 dma, I said that I didn't know which way it would break, but that the bulls have a lot more at stake here than the bears. Yesterday the SPX broke down and just kept breaking down. Before the carnage was done the SPX had crashed a shocking 60.27 points, down to 1200.07, ouch.

Most bullish issues trade above their 200 dma almost all of the time, bearish ones trade below it. I don't know of a better definition of a bear market than that. Since the S&P500 is known by professionals as the stock market, and since it is 86 points below its 200 dma, then I say we are in a bear market. Furthermore we will be in a bear market until we are no longer in one.

I was watching
the S&P500 only to try to get a handle on the overall market, but I have to admit regret at not shorting it 86 points ago. The problem is that even then the SPX was oversold with weekly stochastic way oversold. But now that we are down below the 200 dma the stochastic can stay that way for a long time. So, what to look for?

In the chart above you can see the carnage, almost all of it after the 200 dma was given up. The volume was very strong, but I'm not sure if it was of the washout variety. Look at yesterdays long red candle at 1200.07 and then go left, back to November and December of last year. You can see the support in November at 1175, then the break of resistance at 1200 in December. So, we are sitting right on top of support here, under badly oversold conditions. I recommend that you do not short here. The market has gone a long way down in a short time.

I don't usually watch the Bollinger Bands, but they are useful for some things. For one thing is you never short the bottom of the Bollinger Bands, but even if we had been short all this way I would still say get out whenever the band open outward and stretch almost vertical as they are in the second chart above. You can see in the graphic that the price fell out of the Bollinger Bands. Now the Bollinger Bands are designed so the the prices are contained within them 95% of the time. So, the probability is not good that the SPX will stay this far away for long. It is true the bands can come down to the prices, but it would take a month or so for it to happen. I would rather take a 1/4 position long on SPX here than a full short position.

I have one more exhibit in my don't go short case for SPX and that is the VIX. The VIX is a very simple indicator. "When the VIX is high you buy, when it is low you go." Above you see the 52 week chart of the VIX and we see that yesterday it closed at it's high for the year.

So, don't go short,Ok. How about going long. Only tentatively AFTER some kind of a recovery. Will there be a recovery? I don't know, but that is what I'm looking for in the short term.

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