Sunday, July 12, 2009

Market Mondays

The market continues to have a defensive posture. Using the performance section of, we see that the best performing sectors of the last 90 days were stocks while the best performing sectors of the last month were the IEFs and TLTs (medium and longer dated Treasuries). Within the stock market we see a continued defensiveness with health care and consumer staples being the best performing sectors last week and health care, consumer staples and utilities being the best performers over the last month.

Notice the following on the SPY's chart.

The head and shoulders pattern is complete and prices have fallen through the neckline. Now the question becomes will prices complete the pattern? The standard trading practice for a head and shoulders pattern is for prices to move the same distance as the neckline to the top of the head when prices move below the neckline. That means our rough target is 82 (and again that's assuming prices follow that pattern). Also notice on the SPYs that the 10 day EMA has moved through the 50 day EMA and the 20 day EMA is about to follow suit. Also note that prices have fallen through the 200 day EMA. Finally, prices are below all the EMAs. Simply put, there is a boatload of bad news on this chart. Let's see if the other charts confirm.

The QQQQs chart looks better than the SPYs. Prices did fall through the long-term upward sloping trendline which they then used for resistance. However, prices remain above the 200 day EMA and the shorter EMAs are still above the 200 day EMA (as are prices). Also note that while the SPYs sold-off from their head and shoulders neckline the QQQQs held firm at the 200 day EMA. That is a very important development because one major index (the QQQQs) did not trade in unison with the SPYs. This is the chart that will prevent a sell-off if that does not happen.

The IWMs are also sending warning signals. Although prices advanced beyond the 200 day EMS they have since fallen and are now below all the EMAs. In addition, the 10 day EMA has crossed below the 50 day EMA and the 20 is about to.

The transports are still consolidating. Notice that prices are moving between roughly 61 and 53. Also note that prices and the EMAs are bunched together indicating a lack of overall direction.

The sum total of all this information is the best scenario we can expect over the next 3-5 trading days are signs that the market is rotating back into more aggressive areas.