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Stock Market Not Quite Ready to Rollover Yet

Stock-Markets / Stock Index Trading Sep 07, 2009 - 01:29 AM GMT

By: Angelo_Campione

Stock-Markets

Best Financial Markets Analysis ArticleGeneral Commentary: The system remains on a Neutral signal (with a bearish bias).

The markets don't seem quite ready to rollover just yet, but it seems that a corner was turned this past week.


Tuesday marked the start of September and a time when most fund managers return from summer break, you'd think that they'd come back relaxed and ready to put some money to work, but instead they sell!

The selling pressure is even more surprising given that the ISM came in better than expected and actually now shows expansion for the manufacturing sector.

So what's going on?

Well, It's the old "buy the rumor, and sell the fact scenario". The way it works is that good news gets priced into the market and so when an announcement is made, the professionals sell to those that rely on announcements (the ones that are late to the party).

Where we find ourselves now is that the market has spent six months pricing in all the good news and in the absence of something that is dramatically positive, the market is likely to take a breather and sell when the opportunities present themselves. Remember that the market is rarely rational as the short term is driven by emotions.

To sum it up, even though the market was able to recoup part of its losses from earlier in the week, we now seem to have turned a corner and momentum to the downside should gather pace within the next few weeks.

The week ahead looks like we'll go a little higher early on but lower again by the end of the week.

On to the analysis..

SPX Chart - Bigger Picture

While there was some volatility during the week, the bigger picture is holding steady. We seem to be building up to a point where fireworks will happen (and chances are that those fireworks will be to the downside).

The MACD histogram continues to show negative divergence and the bearish rising wedge also remains in force.

SPX Chart - Shorter Picture

The S&P broke out of the mini bearish wedge to the downside last week with larger volume and finished the week on a positive note, although on very low volume.

This coming week could retest the 1025 - 1030 region but we're not likely to see new highs. So far buying the dips has been paying off, although the dip we had on Tuesday seems to have more conviction this time around, and also the jump on Friday was on the back of the lowest volume we've had all year.

When you add the negative divergence on the MACD to this equation, you get a formula that points to a bearish argument.

For the week ahead, support on the SPX is 980 - 990 and resistance is at 1025 - 1030.

The VIX Picture

The VIX burst out of the blocks on Monday and Tuesday but became complacent again by the end of the week. Two key things happened however, 1. We got a higher high and 2. The MACD got above zero.

If the MACD crosses lower, the markets are likely to hover higher again, although even if that happens, it's only likely to be a short-term move. The mid term for the markets is looking more bearish now.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place. It tends to move inversely with the markets.

Current Position:

The current position from August 24 is a full position in an SPX September 1110/1120 Call Option Spread for a net credit of $0.50.
The premium received if you entered this trade is $50 per $1,000 of margin required per spread (before commissions).

We suggested a Put Spread during the week but didn't get it, so we'll sit with what we have for now.

With 2 weeks to go until expiry and almost a 100-point buffer we remain quite comfortable with this position.

Current Performance for 2009:

(Please note, this performance is in percent and raw, i.e. without brokerage/commissions taken into account)

Quote of the Week:
The quote this week is from Stephen Covey, "We are the creative force of our life, and through our own decisions rather than our conditions, if we carefully learn to do certain things, we can accomplish those goals."

Feel free to email me at angelo@stockbarometer.com if you have any questions or comments.

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By Angelo Campione

Important Disclosure
Futures, Options, Mutual Fund, ETF and Equity trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in these markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to buy/sell Futures, Options, Mutual Funds or Equities. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this Web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
Performance results are hypothetical. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as a lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Investment Research Group and all individuals affiliated with Investment Research Group assume no responsibilities for your trading and investment results.
Investment Research Group (IRG), as a publisher of a financial newsletter of general and regular circulation, cannot tender individual investment advice. Only a registered broker or investment adviser may advise you individually on the suitability and performance of your portfolio or specific investments.
In making any investment decision, you will rely solely on your own review and examination of the fact and records relating to such investments. Past performance of our recommendations is not an indication of future performance. The publisher shall have no liability of whatever nature in respect of any claims, damages, loss, or expense arising out of or in connection with the reliance by you on the contents of our Web site, any promotion, published material, alert, or update.
For a complete understanding of the risks associated with trading, see our Risk Disclosure.

© 2009 Copyright Angelo Campione - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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