Market Update – September 6, 2009

I’ve repeated the mantra the last few weeks, “the trend is your friend.”  The media is abuzz about the current market rally.  “Will it continue? Yes.”   “Will we have a correction? Yes.”  “Will we retest the March lows? Yes.”  If you follow the media, you would have no idea what the future holds.  And the truth is, they don’t; no one does.  What I can tell you is: “the trend is your friend.” 

The current trend is bullish, I think we all can agree on that.  However, we need to be cautious in the next few weeks.  Both the weekly and daily S&P 500 charts are telling us that we are approaching a crossroads.  The next few trading sessions, based on the charts are vital for giving us our trading signals.

S&P 500 Weekly Chart - September 4, 2009

Let’s start by taking a look at the weekly chart.  This gives us the long term view of the market trend.  Yes, the secular trend is bearish.  If we look at the two year trend, it is undoubtedly bearish (but we don’t need a chart to tell us that).  Of course, the last six months have, our short-term trend, is bullish.  Look at the chart.  We are getting some mixed signals as we approach a vital juncture on the chart.

First, lets examine price.  I have drawn two trend lines.  The bearish trend line that began at the market peak in October 2007, and the bullish one that started in March.  There are a couple of items to stress, and the chart says it all.  First, over the last few weeks the S&P 500 has tested, but failed to break above, the two-year trend line.  Will the bearish trend-line be the rally’s Waterloo?  Secondly, we have a long-term triangle pattern at its climax.  A breakout from the pattern could be the answer to the questions posed by the media.

If we look at a couple trend indicators, the MACD and the ADX, we see some more conflict brewing.  The MACD Histogram, while bullish, has been signaling a bearish divergence.  The price continued to rally, but the MACD Histogram (the difference between the two moving averages) weakened during the July-August resurgence.  However, the ADX signalled a bullish crossover in July and the ADX itself is above the 20 level that tells us we are trending (well, the price tells us that, too).

We’ll move down to the short-term trend to see what’s going on.  No doubt we’ve seen some consolidation during the last few weeks.  Since mid-August, the market has been struggling to determine its next move.  1040 has provided reasonable short-term resistance.  Furthermore, we may be seeing the final formation of a head-and-shoulders formation.  Although July witnessed a failed head-and-shoulders pattern, the pattern is frequently a reliable pattern.

S&P 500 Daily Chart - September 4, 2009

The short-term trend is still bullish.  I can’t emphasize enough, “the trend is your friend.”  I know its a worn expression, but it is true.  While everyone decried the end of the market rally the third week of August, they praised the virtues of the rally the following week.  People can’t predict the future price, the top or the bottom of the market.  But we can look at the historical price and make an educated guess.  Everyone wants to be the one who called the top.  But the fact of the matter is that if you stick with the trend, your odds of success rise.

Now, that being said, iff we combine the weekly chart with the daily chart analysis, we see that the market is in a precarious position.  The long-term chart is at the crossroads of the triangle pattern with mixed signals from our indicators.  Furthermore, the short-term chart shows resistance near 1040 and a possible head-and-shoulders pattern.  The short-term trend continues to be bullish, but we need to exercise extreme caution.  The next few weeks will be vital for the market.  It will tell us where we go from here.

I am still focusing on the long side, buying on pullbacks, but I am monitoring my positions closely, reducing my risk more than normal, and looking to see what happens this month.  I will not turn bearish until the trend tells me to, but will be increasingly cautious as the days progress and we wait for a breakout from the long- and short-term patterns.

Related posts:

1. Doom and Gloom – Market Update 17 August 2009 Doom and gloom dominated the airwaves over the last two...
2. Market Update: May 28, 2009 Stocks posted another day of solid gains.  All major indices...
3. All is Well – Market Update August 19, 2009 It doesn’t take much to change the sentiment of the...
4. Weekly Market Update: August 15, 2009 The markets saw their first weekly loss in a month. ...
5. Market Update: July 8, 2009 The markets staged a late day rally, today.  The DJIA...