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ES - The Case for the Bulls
The chart pattern(s) everyone is watching
July 8th, 2012
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Hello:
Over the last week or so we have heard a lot of talk about how the market must go down. The negative news just keeps getting louder and louder and the fundamental arguments for a sell-off seems to intensify. So, this week we are going to take a somewhat contrarian view to the broader markets and make the case for the bulls. What evidence is there that supports a little more upside from last Friday's close? Please note: We sometimes send out real-time updates via twitter: If you wish to receive these updates, simply follow us: our handle is structuredmkts. ( http://twitter.com/#!/structuredmkts) |
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| S&P: The Case for the Bulls.
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1. Short term - the market pulled back for two days into a support level.
Let us start with the shorter term view of the ES. After breaking through resistance two weeks ago and proceeding to resist a complete breakdown (albeit with steep selloffs), the ES managed to make a new multiweek high and then pullback for two days. Friday closed with our first clean 2 day pullback in an up-swing in a while. The two-three day cycle is still a good one to look at and the chart below shows that the two day pullback stopped right around a minor double-bottom area that used to be resistance and is now support again.
After a two day sell-off into support we can expect the market to attempt to bounce.
2. The New High - New Low Index Hit 1000 last week.
This rarely happens in bear markets. In fact, when the index hits this level, pullbacks are almost always a buy. There have been only 1 or 2 instances where this index hit +1000 and the market didn't rally after a pullback and those instances were in MAJOR bear markets where the trend on the daily chart was clearly DOWN. More important is that the market has rarely fallen out of bed completely without attempting to move beyond the high that was made on the day that the +1000 reading was registered.
When this index has hit +1000 in bear markets, more often than not it is the BEGINNING of a new upswing and, in many cases, the early part of a new trend. We are NOT in a bear market on the daily charts so this is not applicable in this instance - it is being mentioned for the sake of completeness.
3. The 4 Year US Presidential Cycle
We are less than 6 months away from a US presidential election. There is a well known, well documented recurring 4 year bullish pattern/tendency around this event.
4. Sentiment
Most of the talk we hear about has been bearish talk - so many reasons for the market to sell-off. So, we pulled up our sentiment indicators. They are all relatively neutral. But, the website SENTIMENTRADER.COM had an interesting article for its members on Friday - Wall Street Analysts are near their all time lows for recommending stocks and near their all time highs for recommending bonds (highs/lows measured as far back as they have data which is about 15 years). Sentiment is growing rapidly bearish (extreme bearishness in sentiment is a BULLISH indicator)...
5. The S&P Daily Chart is still in an uptrend.
In fact, the technical structure is something we term a "power-buy". Don't give us credit for the name - Linda Raschke has used the name and probably others have as well. We like it so we use it as a nick-name for the pattern. In many cases, "power-buys" tend to lead to new highs in price. The structure is shown below - you can see that price made an a-b-c pattern down during the May-June sell-off with the c-leg being extended. But, the low of that C-leg was never taken out. Until that happens, the market remains in an uptrend.
IF the low of the power-buy structure is taken out then the market will officially be in a down-trend. In fact, longer term traders or those using longer term vehicles such as IRAs can hold longs or add to longs with a hard STOP below the "power buy" structure.
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| S&P: The Case for the Bears
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The case for the bears, as we see it, relies primarily on fundamentals - slowdown in China, Euro chaos and slowing demand, bond prices and the normally weak summer season for equities in general. But, apart from the seaonality case, there is no way to say that prices will fall out of bed tomorrow based on the fundamentals. As far as the bonds go - we have seen periods where bonds and equities have moved in lockstep.
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| S&P: Conclusions
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Generally speaking, we will defer to the price action. Since we are still in an uptrend on the daily charts and since we did find support on a 2 day pullback on Friday, we are going to think "UP" in the short term - even if price only retests last weeks' high. Once the macro events really start to force a trend change on the daily charts then we will become fully bearish. Right now, most of the evidence still says "bullish" even if only cautiously so.
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| The Trade(s)
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S&P: Trade to the long side. On Monday, look for a bounce after 2 down days (hopefully, this does not play out completely in the overnight markets!)
GOLD, SILVER: No trade - wait for breakout from large chart formation. We have shown these chart patterns a few times over the past few weeks so no charts shown this week.
SOYBEANS, CORN, WHEAT: Buy 1-2 day pullbacks even if they are large (but check for weather related news first!) See last weeks newsletter for the charts.
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| Important Risk Disclosures and Legal Disclaimers - This stuff is important!
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First you should realize that PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS! The risk of loss in trading commodities can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well as gains. |
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| Other Information
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