The SPX has broken out above the 877 Fibonacci retracement level. This is extremely bullish, and from a technical standpoint suggests the SPX is headed to 934. Closing above 877 is important and will confirm the suspected rally. I expect to see the DJIA test 9000 and the SPX to test 950 over the next couple of weeks. If the markets create support at the current levels, enough consolidation will have occurred to support a substantial rally in the near future. The talking heads on CNBC are finally catching on and have suggested the possibility of DOW 10k by the end of the summer. Please review my archived newsletter http://marketfallacy.com/newsletter/files/Market_Fallacy_%7C_4-7-09_%7C_Cautiously_Optimistic_2009-04-07.html, to see that I have been suggesting this possibility since April 7th, when the DJIA closed at 7790.
Here is one of the articles on CNBC’s website suggesting DOW 10k. http://www.cnbc.com/id/30478135 However, my reference is to the anchors on CNBC’s television show.
Yesterday’s decline was very misleading to a lot people. The market dropped hard and every sector felt the fallout. Because no sector was left unscathed, the effects were magnified. This distortion caused some people to load up on short positions in certain sectors, particularly the financials. However, today’s rally was led by the same financials. Right now the financial sector is the strongest and most influenced by manipulation (term many bears use to describe the government regulation). Please do not fight this trend, the government has made it clear they will do everything in their power, including implementing legislation to benefit the banks. The name of the game is the banks win. On April 24, banks may receive preliminary results from the stress tests and the Federal Reserve is expected to release the methodology for the assessment. Final results are expected May 4.
Today the Treasury Secretary, Timothy Geithner, implied that the stress test results will indicate that most of the 19 biggest U.S. banks will have enough capital. The banks that require further funds are expected to get a mix of converted government preference shares and private money. It is no coincidence that the following this announcement the markets rallied, and were led by the financials. The three largest banks (Citigroup, JP Morgan Chase, Bank of America), by market capitalization, receiving bailout money all advanced at least 9%.
From a technical standpoint, if the SPX can close above the 877 resistance level, the next technical target is 1,008. Closing above 880 and forming a base will be bullish as it will create a new floor about 50 points higher than the previous (830 range). If the markets can consolidate around this level without any significant retracement or without retesting previous levels, we will see SPX 1000 in the near future. Near future here does not mean next week or even next month, but rather implies the SPX will see 1000 before it sees 800. The SPX is still trading within the uptrending channel, and with each passing day, the top of the channel is increasing.
In a shorter time frame Citigroup is making a bullish flag pattern. According to the technicals, no breakout to confirm this pattern has occurred. In this chart, today’s candle was almost a bullish engulfing candle pattern. I understand that “almost” is worthless, but the price action reveals bullish momentum. Citigroup also bounced off of its 50 day moving average this morning, which is also bullish. If Citigroup closes above the $4.00 resistance level for consecutive days, a breakout to $5.00 would be immanent. I can see Citi reaching the upside resistance of $7.00 around the time the SPX is approaching 1000. I continue to see huge upside potential in the financial sector. I expect today’s trend of the financials leading the market higher. It should be noted that this is not as bad as some (Art Cashin) make it out to be. For many experienced traders, the consensus is that the sector that led into the recession will not lead out. While I will agree with this statement, it is important not to lose sight of the fact that the financial crisis was a direct result of the housing bubble bursting. The financials are perceived as the sector that led the markets lower, but this is only because they are larger and received more media coverage. The financials can and will lead us out of this economic downturn. They will not be the only sector as I expect tech and small caps to excel as well.
Posted in Technical
Tagged art cashin, bac, bank of america, bullish, c, citigroup, federal reserve, jp morgan chase, jpm, resistance, spx, stress test, support, technical analysis, timothy geithner, treasury secretary
The uptrend is not over! The markets are adjusting perfectly for the next move higher. In the chart, the SPX is trading in an upward trending channel. The downside resistance in the channel is SPX 820 in a worse case scenario today. It is very likely we will close much above this as closing at 820 would be almost a 6% slide. The horizontal line on this chart illustrates former resistance becoming support. If the SPX retests 820, it will make a double bottom. Not on this chart, Fibonacci retracement levels for 3 month time frame are: 875 and the March lows of 667. It’s no coincidence the SPX retraced after touching 875, this is very healthy. If Fibonacci retracement lines are drawn on this chart, in this time frame, the next support level is at SPX 832. As a result, I am not surprised that currently we are trading at 836. I do not expect the day to get much worse. In the recent uptrend, down days have been violent and on low volume, and today is no different. There has not been more than two consecutive down days since the March lows. Although it is possible for us to be down again tomorrow, I do not expect this, unless there is a negative earnings surprise.
Unfortunately, people forget quickly and have unreasonable expectations. Many bears are coming out of the woodwork, saying “I told you the markets were due.” They proceed to suggest that now the bulls are “bottom fishing.” I find this very ironic since most of the bears have been top fishing for the last six weeks. This time, the bears who went short on Friday, got lucky. There is no real catalyst for today’s downward price pressure other than the fact that markets do not move in a straight line. It is terribly wrong to try to short this rally. Eight months ago I traded by the saying “don’t be caught wrong long.” All this simply means is that if I’m going to be wrong, I might as well be wrong short. Since I was fairly certain the economy was getting worse, this was a safer bet. Now the economy is improving, and the saying has switched. Being wrong short is a recipe for disaster. It’s clear the government will do whatever it has to for the banks to succeed. Do not try to get cute and attempt to time this perfectly. If you are uncomfortable with today’s down move, close your long positions, but do not try to short this. I will almost guarantee, all else equal, the market closes on Friday higher than it closes today.