CURRENT $SPX ENVIRONMENT

It has been quite volatile in the $SPX from the end of February until now.  There has been all kinds of unrest in the world in that short time period from the food cost riots in Egypt, to the unrest (and later military campaign) in Libya, to the disaster in Japan with the massive earthquake, AND the near nuclear meltdown.  The VIX index ($VIX) which measures volatility based on put vs. call option contracts has spiked up, then calmed way back down during that time.   In the US, we continue to run up debt and it seems like every new economic report is worse than the last (last week the New Home Sales number was the WORST on record).  Gas is nearly $4 a gallon again, unemployment is still near record highs, yet, somehow the market keeps going up.  However, we’re sitting here now still significantly below the last high made on the $SPX on February 21, 2011.  WHere do we go from here?

HISTORICAL CHART PATTERN COMPARISON

In technical analysis, particularly when looking at chart patterns, history tends to repeat itself.  For this anaysis we are going to compare the $SPX chart pattern and candlesticks of the current 3 month daily chart with a 3 month period from April to June of 2010, nearly one year ago.  You will see there are quite a few similarities.

WORLD NEWS COMPARISON

We mentioned all the global tension arising over the past month with Egypt, Libya, and Japan.   In April of 2010 we had the begining of the European debt crisis and the crash of the Euro.  There were protests throughout Europe, and countries such as Greece, Spain, and Poland’s economies were teetering on the edge.  Massive bailouts were needed to calm the enviroment.  BOTTOM LINE:  lots of global unrest during both 3 month periods.

TECHNICAL ANALYSIS FOR $SPX — CHART COMPARISONS

APRIL-JUNE 2010.  A huge bullish runup occured in the $SPX Peaking on April 23rd (See A on Chart).  Next, we had an initial large 2-day selloff that broke the 23 day Exponential Moving Average (EMA) support (See B on chart).  That was followed by 4 days of consolidation (sideways movement) (See C on chart), while the market sorted out which direction to move in. This consolidation ended with a bearish 13/23 day moving average cross (blue line below red line)  Next, we broke support from the previous low (April 26) and made a lower low as massive selling ensued, including the infamous “flash crash” (See D on chart).  Next there was a massive relief rally (see E on chart).  This was based on news of European bailouts and shorts covering their positions.  However, this relief rally would fail, as a new selloff would happen soon (see F on chart).

February 2011 through Current.  You can see an eerily similar chart pattern going on right now in the market.  January 1, 2011 through February 21, 2011 was an incredibly bullish run in the market (see A on chart).  Next we had our initial 3 day selloff (see B on chart). Notice the 23 day EMA was broken here too.  Consolidation was longer here (9 days) (See C on chart), but nevertheless, quite similar.   The consolidation ends with a bearish 13/23 day EMA cross (blue line below red) and the selloff continues (see D on chart).  Finally, we see a similary relief rally (contratrend) occuring right now (see E on the chart).  This relief rally is occuring after coalition forces moved into Libya and as the Japan situation stabilizes and again, shorts cover.

WHERE DO WE GO FROM HERE?

This is a very critical juncture for the $SPX. And the $SPX represents the entire US Stock market.  3 out of every 4 stocks moves in lock step with the $SPX.  The last candlestick printed on the $SPX is a shooting star (which is bearish).  This candle happens at the end of an uptrend.  There is a gap up and bullish momentum throughout the day, but it sells off toward the end of the session.  If we have significant down day on Monday (good sized red candle), look for the selloff to contine (like F on the first chart).  However, If the market goes up much more from here, the bearish pattern could be nullified.  Stay tuned.  Next week will be interesting.