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Stock Market Heading for a Period of Consolidation

Stock-Markets / Stock Index Trading Feb 22, 2010 - 01:59 AM GMT

By: Angelo_Campione

Stock-Markets

Best Financial Markets Analysis ArticleGeneral Commentary: The system for the SPY is on a Buy signal 25%

The market has enjoyed a great rally over the last couple weeks, retracing to the 61.8% Fibonacci level (that's over 6% in 2 weeks). There's a very good chance we'll see a pullback from here so that the market can digest these gains.


The interesting thing is that the market has been able to put in some decent gains in the face of negative news in Europe. This indicates that the market isn't ready to rollover at this point. And even though we're likely to see some weakness short term, the medium term is looking stronger again.

On a pullback, I'm looking for the 1070-1080 levels to hold (and this is likely to be a good entry point for the longs), and then when 1110-1120 is cleared, 1150 is likely to be the target.

SPX Chart - Bigger Picture

The bigger picture shows the uptrend continuing to hold and even shows the RSI heading higher. While the MACD is negative, it actually is showing signs of wanting to head higher again. This will take several weeks to show if this is a true interpretation or not.
At this point, if the trend continues to hold, the potential over the next several months is for a rise to at least the 1200 level.

SPX Chart - Shorter Picture

The shorter term shows the impressive rise on options expiry week and that we're now at resistance. I've drawn the potential point at where we might find support for a head and shoulders bottom to form, whether this actually develops, I don't know.

At this point, the evidence we have is that there is positive divergence on the MACD histogram, the MACD histogram itself is positive, the linear MACD has crossed positively and the RSI is above 50, which is positive.

So while there are many positives showing up, the market still needs to breathe and I think that a week or so of breathing will really set up a high probability move into March.

For the week ahead, support on the SPX is 1070 - 1080 and resistance is 1110 - 1120.

The VIX Picture

The VIX retreated this past week as anticipated and now sits on support. The chances are good that we'll see some oscillation between 20 and 23 as the bears and bulls work out who will take charge.
The linear MACD has dropped to a point where it can bounce quite easily. A consolidating period seems likely, which also supports the scenario described for the SPX above.

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.

Performance
We're using a starting capital of $5,000 and allocations are based on 25% of this or the remaining balance.

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By Angelo Campione

Important Disclosure
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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.
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© 2010 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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