For Sunday, July 18, 2010                                             Go to Website
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Last week we wrote:

"All of Fibtimer's aggressive strategies are now in bearish positions. There are many indicators pointing to lower lows, and some indicators pointing to higher highs. Confusion is the order of the day."

This week:

Last week we talked about the dramatic swings in the stock market and the lack of trend. This makes holding either a bullish, or a bearish, position risky. This is, of course, why we are in cash.

Last week's holiday rally continued into this week. But when the S&P 500 Index - SPX hit its declining 50-day moving average line (see below chart) it stopped rising. On Tuesday through Thursday the highs stopped right at the average line. An indication of what was about to occur.

On Friday the SPX opened at the 50-day average line, and then sold off. Friday's selloff erased all the gains for the prior five trading days and loped 2.98% off the index. The SPX finished the week with a loss of 1.2%.

On Tuesday we had another better than 9 to 1 up volume vs. down volume day. This time it was a 12 to 1 day and it is the second such day in only six trading days. We have had six of these days in the past two months.

Either there is the mother of all bull markets ahead, or the indicator is, this time, the result of an increase in volatility that is tossing the markets up as well as down ever since the stock market topped back in April.

Tuesday's 9 to 1 day was reversed within three trading days. Not a good sign.

Friday's decline was triggered by a huge drop in the University of Michigan sentiment index. The index fell to 66.5 in early July, from 76 in late June, as consumers worried about weak hiring and a slowly healing economy. The June reading was the highest level in more than two years.

The reading has only dropped this much or more seven times. The drop of 9.5 points in early July compares with a drop of 9.7 points following the terror attacks of Sept. 11, 2001.

Note that there is always a reason for any reversal, but typically they occur at well defined resistance levels and this was the case on Friday. Remember that the SPX was unable to make much headway for several days prior to the selloff. That was an indication of what was ahead. The University of Michigan Index was only the catalyst.

Looking at the daily chart there have been four steep declines in this correction to date. Each has been followed by a rally and some of those rallies have had the bullish 9 to 1 days in them.

But if you look at the daily chart below, regardless of those four rallies, the direction of the stock market is down. The first three rallies failed at lower highs. If Friday's reversal marks the top for this latest rally then all four rallies have failed at lower highs.

Each decline has had a lower close at its bottom. This is not a bullish chart.

We have added a declining trend resistance line (red line) to the chart. By connecting the failed rally highs you can easily see how each rally has failed at a lower level than the preceding rally.

Friday's reversal selloff reversed right at this declining resistance line. This is not a good sign for the coming days and weeks.

The 50-day moving average is steadily declining and has now crossed below the 200-day moving average. This is a widely followed bearish long term indicator.

The SPX is well below both of these averages.

The reversal of the SPX right at its 50-day moving average as well as its declining trend resistance line is ominous.

Last week we wrote; "There has been a huge amount of technical damage over the past months. And the reason for the selling has not been, to our knowledge, resolved in any way. This week has the feel of short covering."

Keep an eye on the SPX 1000 level. That is where the declines stopped two weeks ago (at 1010.91).

The SPX 1000 level is an attention getter. If the SPX closes below this round number, it will make headlines on every news channel, internet news site, and will also cause chills in every investor who watches charts.

If the SPX 1000 level breaks, the new target for this decline will be SPX 869.31 (see weekly chart below). That is almost 19% below current levels and we would be in a new bear market if this level is reached.

Two weeks ago we wrote; "We could very well bounce next week considering how oversold the markets are, but after that bounce, it is hard to imagine this much damaged stock market continuing higher."

We had a rally for eight trading days. In the last three days the rally could not move much above resistance (see below chart). On Friday the SPX reversed hard and ended the week with a loss, erasing a week's worth of gains and more.

Next week we will start after traders have had two days off to consider their positions and Friday's selloff. It will be interesting.

We will re-enter only if the SPX confirms a new lasting advance has begun. Otherwise cash is the best position considering current volatile conditions. Some aggressive traders have difficulty with a cash position. They see each day as opportunity lost.

But cash is an important and valid trading position. The stock market's major trend remains down, but the volatility is so extreme that any position can quickly result in substantial losses. Be patient.

Conclusion:

The SPX is currently below its 50-day moving average. The 50-day average has turned lower. The SPX is now below its 200-day moving average. The 50-day average has crossed below the 200-day average. This is bearish.

We have had "six" unusual and bullish breadth explosion days. Typically two within two months marks the beginning of a bullish advance. The stock market has ignored these hugely bullish days and is now considerably below the all but one of them. This is, we feel, bearish.

The double-bottom we had been watching has been broken to the downside. A very bearish indicator.

The SPX bounced at the 1010 level and rallied two weeks ago. This rally may have ended in Friday's reversal.

If the SPX reverses and closes below 1000 we have a likely bear market ahead. If we continue to rally, we will be watching for confirmation of a new trend.

S&P 500 Index (SPX) Daily Chart

S&P 500 Index (SPX), Weekly Chart

Nasdaq 100 Index (NDX) Chart Analysis

Last week we wrote:

"The NDX reached NDX 1712.89 last week which is the February correction low. This level held and resulted in a rally this week."

This week:

Two weeks ago the Nasdaq 100 Index - NDX reached 1712.89 which is the February correction low. This level held and resulted in a two week rally.

The rally ran into strong resistance in Tuesday’s advance and even though the NDX made higher closes over the next two days, it was unable to surpass that resistance.

If you look at the below daily chart, the resistance is the 50-day declining moving average, as well as the 200-day moving average, plus a declining trend resistance line created by drawing a line through the prior failed rally highs.

All of these come together around the NDX 1850 level.

After consolidating at this level for three days, the NDX reversed on Friday and sold off, erasing the entire week's gains plus some of the preceding week's gains.

Last week we wrote; "The rally has reached short term resistance levels at NDX 1820 and then NDX 1848. These are the 50% and 61.8% retracement levels for the just completed leg down. They could turn the NDX lower next week."

There have been four legs down in this decline. Each has reached lower closing lows. Three of the four subsequent rallies have reached lower highs. If the reversal on Friday is the start of a new decline, it will mean all four of the rallies have reversed at lower highs.

The NDX is below its 50-day moving average which is trending down. It is also below its 200-day moving average. Unless we move higher, these moving averages will have a bearish crossover in coming days. The SPX chart already has this bearish crossover.

Conclusion:

The NDX is below its 50-day moving average. The 50-day average is declining. The NDX is below its 200-day moving average.

The NDX had a well defined double bottom in place and that double bottom was broken. This is a very bearish indicator.

The NDX stopped right at its February lows and this resulted in a two week bounce. But the technical damage to the stock market is such that we do not see any bounce lasting for long and this Friday the markets sold off in a 3% drop that erased the prior week's gains.