Futures rally on better than expected Q3 GDP (3.5% vs. 3.2% median estimate). Is this enough to stop the current retracement? There will be an early morning pop, and the markets won’t take long to reveal which way they are headed. If the early morning gains are not sustained, SPX will retest 1000. Yesterday, NASDAQ closed below 50 day moving average on 120% of 10 day average volume.
Tag Archives: spx
I apologize to those consistently checking for new posts, and I thank you for your dedication. As the school year came to an end, I didn’t feel comfortable posting without giving my undivided attention to the current events in the market. The markets are dynamic and require constant interpretation.
Having said this, I’d like to reiterate my positions and price targets. I am still bullish on the financial sector, as well as the overall market. I can see both the DJIA and the SPX testing 10,000 and 1000 respectively before any significant resistance and/or retracement. During last week’s move higher, the trading volume spiked above the 10 day average, about 5B. This week is setting up for a huge move, many will suggest lower, but I believe we could see the mother of all short squeezes. As of the end of March, there was approximately $3.9 trillion in money-market fund assets and about $3.4 trillion in equity mutual fund assets. This unusual proportion implies that the current rally could pick up steam, and fast. From August 2008 to March 2009, there has only been one month where equity assets have increased, December. Although February to March did increase, April’s numbers will be more telling. Money-Market assets have consistently increased from September 2008 to January 2009, remaining essentially constant from January to March. May of 2008 boasted excess of $6 trillion in equity assets suggesting the current position could almost double. The price impact of this large of a monetary influx would be tremendous. Yesterday’s decline was short lived, and it should be noted that tech did not decline as much as the rest of the market.
After the market closes I will continue the post.
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.
The markets are closing in on the gap between last Friday’s close and the 7th week of consecutive up weeks. Actually, some of the indices have already filled this gap. The Nasdaq Composite, representing smaller and technology based companies, which is positive year-to-date, has already filled the gap. In the charts above, the Nasdaq Composite, Apple, Google and Research in Motion are all currently establishing a new floor or support levels. Similar action is occurring in the Russell 2000. Both the Nasdaq and the Russell 2000 indices have consistently led the rally. Put another way, the Nasdaq and Russell 2000 have foreshadowed both the rallies and the declines for the last couple of months. It is for this purpose, that I reference them and point out the consolidation activity.
I also want to address Citigroup’s behavior. Citigroup is the only large bank that is not taking part in the current rally. Large banks here refer to Citigroup, Goldman Sachs, Bank of America, JP Morgan Chase, Wells Fargo and Morgan Stanley. The days following Citigroup’s earnings announcement, have seen the stock drop by approximately 20%. Citigroup has declined the last couple of days on lower than normal volume. However, yesterday’s candle on Citigroup was a hammer, a bullish sign. If Citigroup closes above $3.30, today’s candle will be a bullish engulfing candle. This would confirm yesterday’s bullish suggestion.
The importance of volume cannot be stressed enough. The higher the volume, the more valid the market movement. If the SPX closes above 870, extending the consecutive week streak, and does so on high volume, this will confirm my expectation the markets are setting up for the next move higher. The 10-day average volume for the SPX is about 6.1B shares. Currently the SPX has traded about 3.5B shares halfway through the trading day.
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.