The following analysis is in the context of SHORT to INTERMEDIATE TERM. Long term, I remain quite bearish.
The market appears to be behaving rather technically as of late, thus I did some analysis. My philosophy is simple...the more technical levels that converge, the higher the probability of them being significant is. Another saying I made up is "When people don't know what the heck is going on, they look to technicals." I will look at the following short list of items:
Bollinger Bands
Moving Averages
Fibonacci Retracements
Support and Resistance levels
Here are the most important items, as I see them.
First, the large 3 day sell-off. It was not about Bernanke, IMO...that was a red herring. It was about bank regulation, the "Volcker Rule", and growing populist views, which is likely to take root given recent Democratic loss in MA. We penetrated the lower Bollinger Band quite harshly on 1/22, showing the significance of the move.
For the next four days, we essentially went sideways. Where was the snapback rally? Something has changed. This week, we bounced off 1100, which is acting as resistance. If you go back to mid October, you can see a small top near 1100, followed by a long consolidation period centered around 1100, from mid November to late December (actually...rangebound 1085-1115, if you round). You can see the 1100 level and this range highlighted in BLUE on the graphic.
Also coincident with 1115, happens to be the 50 day simple moving average, which seems to be en-vogue these days. Therefore, I predict that even if we can close above 1100, that 1115 would be a strong resistance level. Couple this with the face that over the next few days the 20 day moving average, or the center of the bollinger bands, will drop into the 1115-1120 range as well for uber-technical resistance
(POINT A). Right above this level, is the 50% Fib retracement from the 1576 high to the 666 low...a key level in itself.
Over the last few days, we have been resting along the bottom of that old range, near 1085-1090. Also, of monumental importance technically, and in a rather simple way, is a trend line going back to mid August. It's the "purple crayon" approach, as labeled by the "late" Jeff Macke (no longer on fast money). "The trend is you friend", and "What do you do when you spot a trend, you ride that trend to the end." All those sayings ring true...it's just a matter of scale. Start small, then expand to larger/longer scales. So...this magenta line on the graphic is the trendline...which just so happens to intersect our lower range near 1085 (POINT B).
If this trendline breaks, then finding a support level of relevance becomes tough. You can only look to the intermediate term lows set during the rally...1030 on 11/2, 1020 on 10/2, 980 and 995 in Aug/Sept. One thing makes the 1030 level look more promising, and that is the fact that it would be nearly a 10% technical correction...1035 to be exact (from 1150). But wait...it doesn't stop there! We also have what could be considered a flag pattern, with the "mast" from 1150 to near 1090. The rule is that you go down the height of the mast, so that would be 1090-60= 1030! So we have three reasons to target around 1030. I like this level...actually, I like just above it to give yourself some error room in case others start piling in prematurely. Basically, < 1040 might be a place to put money to work.
Below here, we have a 38.2% FIB retrace from the top, but more importantly the 200 day moving average. Of all the moving averages, this one seems to have gained the most respect.This average will continue to rise for a while...probably into the 1015-1020 range. Hey...the 38.2% FIB is 1014. So look at < 1020 if we break 1030's. However, if we get as low as 1014, there may be a gravitatinal pull to test 1000. This would be an obvious level to get in if you want to play the market.
Now that we have determined technical levels, lets review our larger scale background pattern. We have a populist movements to crucify the big banks. We have Greece and Spain and tension in the Eurozone. Dollar may rally...if it rallies too far, may unwind a carry trade which could be violent. We have an employment picture that is NOT improving. All of this is weighing on the market currently, which is why there is NO rally back. At some point, if none of the fears come to pass, the weight will be lifted, and we may have lift-OFF! But until then, the technicals may be a good play...but also beware that there are still dangers out there, which is why I am only good for some hops in and out of the market at this time, with my home base in the G fund.
Disclaimer: I don't know anything.
