SP500 finely balanced - but leaning to the upside.

I believe that most the time markets are finely balanced, the price at any one time relative to an earlier period reflects the various arguments for and against a higher or lower price, be they Technical Arguments (which in my opinion are a graphical depiction of the overall market psychologically), or Fundamental Arguments. - That is not to say that I believe the price is necessarily right at anyone time, but rather that it could go either way, depending on whether the bullish of bearish factors win in the short-term, eventually though it will move to the right price level, though when that occurs and how that occurs is a path unknown, indeed even the idea of a correct price level is itself a subjective argument. - But as the great investor and trader Benjamin Graham once said "In the short run, the market is a voting machine, but in the long run it is a weighing machine." 

- In recent weeks I have espoused various Technical Arguments in favour of the Bull Case, along with some contra arguments which could argue in favour of the bear case. Last week was an interesting week, after an initial break up through key resistance, the bear case appeared to re-assert itself with a number of potential warning signals causing concern, however this turned around sharply on Friday posting a strong bullish move on decent volume which took the SP500 back towards the high of the week, indeed Friday may well have been a key day. - I will re-iterate the 5-day Candle Pattern formed over the course of the week, which I mentioned on the afternoon update on Friday, it is a pattern known as a 'Rising 3 Methods' pattern, this is a continuation pattern, an example of this is shown below:

The above pattern is a short-term pattern, and as with all short-term patterns follow through is required as confirmation, without this the pattern could be null and void. In the meantime the SP500 is very close to significant resistance at 1050. I have 4 different signals acting as Resistance here at 1150 on the Daily SP500. The chart below shows three of these. 1) The Horizontal Line drawn from the Jan 2010 highs. 2) The Mid Line on the Andrews Pitchfork. 3) The top of the Rising Channel which has largely contained price action over the past 5 months, and which is projected from resistance and support form 2009.  The Fourth resistance level is the 2/3rd retracement of the decline from April to the June low, which also occurs at 1050.

However, what is also crucial is that last week saw a break up over the neckline of the Inverted Head + Shoulder continuation pattern, which can not be seen in anything other than a Bullish light. 

One of the markets giving me concern last week was the Bank Index, this has been the laggard market in recent weeks. Friday however it made a decent bounce off support, keeping a large Rising Wedge pattern (A potentially Bullish Formation) as a remote possibility. Note I had said on Friday that the top line of this had been busted, however this appear not to have been the case (See chart below showing the BKX ETF).

I will re-iterate the various Bullish and Bearish arguments in greater detail in tomorrow's post. I hope today's post is not too confusing, in summary I think the odds are increasingly favour the Bullish side, though the Bearish arguments still weighs on this.

SP500 Index, BKX and VIX Update + classic Fawlty Towers.

Yesterday's setback for US equities has not resolved anything, the likelihood of a pullback was strong after the breakout of the neckline of the recent inverted Head + Shoulder formation, however I am still undecided as to whether this is merely a pullback to correct some of the strong rally over the past 3 weeks or if we are looking at something more worrying. I made a decent case for the bullish argument a few weeks back, (This can be seen by clicking here and scrolling down the posting), yesterday I said that there a number of warning signs suggesting caution, that posting can be seen here. - Today I am bringing something new to the argument, it is a further interesting twist on the SP500 it shows the range of the past few months as a very wide consolidation band, sloping slightly upwards. However, whilst at first glance these lines these lines, and particularly the upper line, appear to be drawn against the recent highs and lows, they actually extend a lot further back. - I have pasted a second chart below showing these same lines extended back to 2008.

When looked at from the bigger picture, this turn down from resistance looks like it may have greater significance. The upper line acted as key resistance in June 2009, then as support on several occasions through late 2009 and early 2010. Since late May (the flash crash did break it for a few minutes in early May) it has acted as resistance, with the exception of the failed break above it in early June. - This line has proven to be pretty pivotal over the past year and a half. - The same can be said for the lower line which exactly parallels the upper line. The lower line acted as support in late 2008, despite being broken for a couple of days on a spike basis, it then provided support through Jan 2009, once broken it saw a very sharp decline to the March 2009 low, however when the market recovered it acted as support in April 2009 and again crucially in July 2009. More recently it provided solid support to the two recent lows of June and August this year. - Of course the rejection of the upper line does not mean that it will not break above it, however I think this has throw out a further warning indicator to add to the points I made yesterday.

With regard to yesterday's posting, the Bank Index posted a very poor day yesterday, and closed inside the upper declining wedge line, which further points to an increased risk of a false breakout of this declining wedge. (See chart below).

Finally the VIX index continues to stir, this had failed to decline with the recent rally, it not surprisingly jumped on yesterdays sell-off, and is very close to the upper line of a large declining wedge. A break of this line would be a concern, suggesting possible further gains for the VIX. (See below).

To sum up my view, I do not have a firm opinion at the moment on this, I see an underlying Bullish structure bigger picture, but shorter term I see some indications that are a touch disconcerting. On the downside, I would not take a bearish view yet, I would like to see some sort of cofirmed short-term top, this I do not see yet. I think the market may help me make up my mind in the couple of trading days, in the meantime patience is warranted.

PM UPDATE

The market has made a strong upmove in the wake of this afternoons data, and is currently re-testing the early weeks high, if the market closes anywhere near current levels (1142) this will have completed a Bullish Candle Pattern known as a 'Rising Three Methods' pattern, which is a Bullish Continuation pattern. The insert below shows a typical 'Rising Three Methods' pattern, the chart below shows the current Daily SP500 Future. If the SP500 does hold this level into the close it shifts the odds towards further gains for equities, at least in the short-term.

 

 

Finally something for the weekend.

Earlier this week I had a frustrating ordeal talking to a Call centre in India,,, sound familiar?....As the conversation progressed (or rather did not) I could n't help thinking I had the Sub-continent's equivalent of Manuel of Fawlty Towers fame on the other end of the line. Which leads me nicely into this weeks 'something for the weekend', a couple of clips from the brilliant 'Fawlty towers'. The first clip is the Spanish waiter Manuel on the phone. The second clip demonstrates Basil Fawlty unique way of dealing with Communication issues, I would love to know how he would have dealt with an Indian Call Centre.