Sunday, May 2, 2010

State of the Market

Though I devote the lions share of attention on my blog to option concepts, I have occasionally diverged from the beaten path to point out notable developments within the technical analysis realm. Since I was brought up with a fair amount of chart reading, I can't help but notice when identifiable patterns crop up in the price action of the overall market. Though I've toyed with the idea of blogging more about charting and my directional forecasts, thus far I've opted to stay focused primarily on option content. Perhaps one day I'll offer up a broader range of fodder for both option traders and chart junkies. As it stands there are no doubt countless other sites offering more chart analysis than you can shake a stick at. Today's post will mark yet another deviation from my norm as I highlight some significant patterns using the S&P 500 Index. First, a look at the weekly (click image to enlarge):

[Source: MachTrader]

Here are my three bearish observations. First, a close encounter with the 61.8% retracement of the entire 2007-2009 bear market. It seems the bulls initial attempt to breach this level has been rebuffed by the bears. Second, with eleven straight up weeks the market has definitely achieved overbought status. Third, last week's bearish engulfing candle deserves some consideration. Now, a look at the hourly:


The hourly has developed a rather pronounced head and shoulders pattern over the last week with 1180 acting as the neckline. I'll be interested to see how we react around this level in the coming days. It's also important to know when a chart pattern has failed. As I see it, a break back above 1210 (right shoulder) and especially above 1220 (head) would bring to pass yet another fake out and sucker punch to the bears.

Given that this two year meteoric rise in the SPX has been rife with many a false top and bear trap, who really knows whether this will turn out to be some type of major top. As for me I'll be taking it one day at a time. For now, I see 1180 and 1150 as two significant downside support levels to keep an eye on.

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