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June 15, 2008

1370 and/or Bust

In Thursday's post, I described how the S&P 500 was set for at least a countertrend bounce, if not a trend-changing move. The market turned north on Friday, just as anticipated. The nature of this bounce will be the most pertinent information we can attempt to ascertain regarding the intermediate-term fate of the market. It may take several more days of action to make such a determination, but let's have a peak at what we have so far:

stock chart

Support and resistance areas tend to attract price like gravity, so it seems we will have a test of the 1370 area in the coming week as there are two significant indicators lurking at that price level. Zooming in on the 60 minute SPX chart, we see another reason the 1370 area is so important. If the selling since mid-May is simply a correction, it should end as a 3-wave form, followed by a run to new highs. If we have started a new major bear leg, the selling from the May top should take a 5-wave form, with the 4th wave having begun Friday. However, a 4th wave cannot overlap a first wave. Therefore, price should turn south before we notably penetrate the 1370 area or we can expect even higher prices.

stock chart

The banking index put in a nice intraday recovery which likely sets up the back test of the 75 level. Such a bounce would support the case for further near-term strength in the general market.

stock chart

So those are the basics to watch right now. Several sentiment indicators I monitor, such as put/call ratios and bullish percent indexes, have reacted to the recent downswing but are nowhere near extremes. Let's just keep our ears to the ground and see how things unfold.


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