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July 24, 2009

S&P 500 Musings

The world is full of frustrated bears. Shortly after the beginning of this rally in March, I noted that we were due for the mid-term rally which would correct 18 months of decline. I warned that 18 months of decline would not be consolidated in only a few weeks and even postulated that the rally would last through the summer. Unfortunately, as the action unfolded I did not heed my own warning and was drawn into the fray, making several unsuccessful attempts at the short side. I have kept the damage minimal through position-sizing and hasty exits, but am still left shaking my head at a situation where following my own outlook could have saved me some cash or perhaps even banked some nice coin.

On the positive side I have avoided be short through most of the recent surge by virtue of the early break above the 65DMA on the S&P 500. Let's take a look now at what we can expect through the rest of the summer.

s&p 500 daily chart

The rising volume during this most recent surge tells us that we will likely see more than one leg on this sub-wave. I am therefore looking for a 2-4 day pause, followed by another couple weeks of rally. If we're lucky, the second leg up will terminate at one of our targets, such as SPX 1025 or the pivot marked above, along with congruent indicators. There is no historical pivot to lend weight to the 1025 target, but we may be handed an inflection courtesy of a dynamic pivot value:

s&p 500 weekly chart

The 75WMA has been such a potent inflection point over the last few years, I am willing to take a short solely on a meeting with that value. If our other projections line up with such a meeting, we could see the end of this monster bear rally.


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