S&P 500: Inflexion Point
Its difficult to analyse from a technical perspective which direction the market will go. Someone taught me that its best to be a master of a few technical indicators better than use so many that just cloud your senses.
Dual Moving Averages if setup correctly for long term smooths out the volatility such that you have a good idea the general long term direction of the market. Here I set up my moving averages using a 50 day fast moving average and a 100 day fast moving average.Accompany them is a 200 day moving average.
The 200 day moving average is an important indicator. When prices cuts the 200 day moving average from either top or below, it sends bullish and bearish trend changing or confirmation signals. Reversals along 200 day moving averages also is a good indicator. The problem with 200 day moving average is that the signals is normally too late such that you have already lost quite a fair bit or missed out making a fair bit.
Using dual moving averages gives a much better signal, but the problem is that you have to set it up with the correct values. No one can tell you what is the right value. You got to back test it yourself.
The chart below shows the S&P 500 10 year weekly chart at the 2001 - 2003 bear market.
Notice that if you depend on 200 day moving average to add or rebalance your portfolio, you still lose a fair bit. However, relying on the dual moving average (pink and orange lines) will enable you to exit earlier.
In contrast, at the bottom of the market, position your portfolio into equities when the 50 day cross the 100 day from below will ensure that you do not get caught in any bear trap.
This chart is using the same set up, only thing this is that really bad plunge in 1973 -74. Notice that relying on the 200 day moving average is a bit too slow to save you from such a plunge. Then again, using the dual moving average setup u will missed out on the drastic uptrend that follows the plunge.
Also as a note, relying on RSI as overbought or oversold won’t get you any where close to the bottom. You can see that there are numerous instance during that plunge that the RSI is below 50 and near 25-30 that is at over sold level. The better way to use RSI is to use it to find the divergences from the price movement.
Current Trend
Which brings us back to the current trend. The chart below shows the recent price movement on a 2 year weekly chart.
You can see why the fed extended that helping hand to Bear Stearns that day. The Fed have become market technicians! By engineering that move, they managed to enable the S&P 500 to stay above the 200 day moving average. That have created one bullish signal artificially.
However, the movement can go either way now. Looking at the pink and orange lines you will see that the fast 50 day moving average is narrowing vs the 100 day average. The 50 day and 100 day have probably become important possible inflexion points that will determine the future direction of the markets.
The MACD looks tremendously low, but the thing about it is that it can whipsaw at this low level as well. Nevertheless, this oversold level is one bullish indicator.
The RSI is showing renewed strength at a low level. This is bullish as well.
So the question is are we ready for a big rally up?
The resistance at 1400 and 1450 is important. Clearing them convincingly would enable the 2 moving averages (50 & 100) to open up, staging a reversal.
However, if more bad news next 2 weeks and it fails to clear these 2 hurdles would indicate that the next leg of the bear trend is on. The 50 day moving average will cut the 100 day from above. that is very bearish.
Finally, if it really fails to clear 1400 or 1450 convincingly, look for 1300 to hold. If it does not, then abase, we won’t have that creamy filling, as Jim Puplava will say.
My Allocation
Alot will depend on how the technical picture will play out. There is just so much negative and bullish views that it really distracts one. A convincing break above 1450 and i will add on to my UOB United International Growth and Fidelity Emerging Markets.
Failing to clear them, I would sell part of these holdings.
The technical picture is not that easy to read for a noobish guy like me. Hope experience guys can advise on this analysis.
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[...] i have wrote last week that we are at an inflexion point on the SP 500, this week was a pretty non event, that is, up until friday, when GE released a rather bad result [...]