Sunday, July 4, 2010

S&P 500: Another Death Cross Imminent?

S&P 500 Index had a "death cross" (a very, very slight one) on the daily chart on Friday, where 50-day Simple Moving Average crosses below 200-day Simple Moving Average.

The index is about to have another death cross on the weekly chart. On the weekly chart, I look at two Exponential Moving Averages (13-EMA and 35-EMA) to see whether they are crossing, or 40-week Simple Moving Average to see if the index crosses below it.

Here's 3-year weekly chart of S&P. 13-EMA and 35-EMA is about to cross: less than 3 point. As you can see, 13-EMA crossing below 35-EMA in December 2007 was a pretty good indicator of a major directional change of the market. 13-EMA stayed below 35-EMA all the way till July 2009. 13-EMA/35-EMA pair does not call the market bottom, but rather it seems to indicate the safer point to go long, as in July 2009. Now 13-EMA may be crossing down again for the first time since December 2007.

I also use 40-week Simple Moving Average on weekly. As you can see, this one spotted the turn in the market a few weeks earlier than 13-EMA/35-EMA cross. Week before last, the index decidedly broke below 40-MA, and it couldn't regain that line this week.

End of the "bull market", as many pundits and analysts are saying?

I don't think so. I'm in the Peter Schiff's camp in thinking that this has been a Federal Reserve and government stimulus-induced counter-trend bull run within the bear market and the run is now ending. Elliott Wavers would say P3 has finally arrived. (The only problem is that they have been calling P3 at every downturn in the market since March 2009.)

Some technical indicators, which, along with 13-EMA/35-EMA cross, I picked up from guys, also show that the market was never in a bull market. They are all flashing a sell signal. Slow stochastics set at really, really slow (144) shows that the indicator never went to oversold territory in the whole "bull run" from March 2009. Notice that at the market top in October 2007 it was in the oversold territory of above 80.

CCI set at 133 also shows that the market was not in a bull market (above 100). It went nowhere remotely near 100 since March 09. In a bull market, this indicator stays mostly above 100.

Along with another long-term indicator NYSE Summation Index (Cumulative) that also turned bearish in late May, these special technical indicators and moving averages give me some sense of peace of mind, knowing that the things are about to get dicey...

Be safe.

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