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Tuesday, August 12, 2014

Daily update 8/12

We got the moderate pullback I mentioned last night might be a buying op.  I guess we will see if that turned out to be a good buy point.  Here is daily SPX chart.

We sold off enough today to fill in yesterday's gap up.  For the last 18 months big upside gaps coming off the 100 DMA have gone unfilled as the market just kept flying up to new highs.  It rarely made it easy for people to get on board.  The fact that it backed up today to let people on is definitely a change.  Whether that is an important change or not remains to be seen.  Lets have a look at the futures chart.

The futures have been struggling with the 200 SMA.  However, we now have two bars with bullish tails.  The fact that the market was able to sell off a bit without collapsing is likely to embolden buyers.  Overnight news permitting I would expect the market to rally tomorrow.  If that plays out then we should have a pretty good shot of getting to the 50 DMA.  While the market was down today the selling seemed rather muted.  I think the majority of people are hoping for higher prices to sell at.  If we break today's low then all bets are off on the long side. 

I don't have a clue how this is going to play out.  The divergences we had at the top looked like a bull market top.  However, that does not preclude a test of that high with even bigger divergences.  However, the 50 DMA or the area of the 7/31 gap down could be brick walls.  The really light volume yesterday and today suggest a lack of interest on the bounce so far.  They try to make excuses on TV as a summer lull.  However, if the big boys wanted to add exposure they would be calling in from the golf course to tell the junior traders in the office what to do.  We are coming off the 100 DMA and an over sold condition.  There would be more volume if there was real interest.  So we have to take it one day at a time and see what happens.

It has been an extremely long time since SPX touched its 200 DMA.  I thought this data was pretty interesting.


There have only been 5 streaks longer then the current one.  Only in 1998 did SPX go on to make big gains in the next year after the streak ended.  There were also a couple of cases of negative returns one year out.  There was a 50% decline after the top in 1937.  What is particularly interesting about 1998 is how that played out.  While SPX continued up from the fall of 1998 that ended the streak a lot of stocks did not.  That was when the big cap tech stocks went totally wild and left many stocks behind.  With small cap stocks already in bubble territory I suspect once the streak ends the returns one year out will not be very spectacular and could easily be negative.


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