Investors Business Daily:
Probably the safest way to play this market now is to use IBD’s rally criteria. Per that criteria, you would wait for a big rally day, like we had this past Thursday, and then look for a follow through day that should come within 3-10 sessions. That follow through day would be a huge rally of close to or exceeding 2% with very strong volume and this would confirm that a new rally is starting. If you don’t get the follow through day, then what you saw was just a dead cat bounce.
On Thursday $SPX rallied 1.09% and the day’s low was 1412.20. For the current, potential IBD rally and buy signal to be valid, $SPX can not close below 1412.20 before we get the monster, confirming follow through day. If $SPX should close below 1412.20 on Monday or Tuesday, then the signal is negated and we’ll just have to wait for the next set up. It’s going to be tough to get clear of this level since we’re just 2pts away from that now.
The market is currently at a very critical and dangerous juncture and could be setting up a lower high/lower low scenario. The parameters for confirming this are Friday’s intra-day high of 1434.27 and the intra-day low from Friday, October 26th of 1403.28. The Bulls will want to see the market push above 1434.27 sometime early next week and the Bears will want to see the market drop below 1403.28. These only need to be intra-day moves.
The market needs to let us know if it has the ability to put in a new high or if it is so weak that it just rolls over and puts in a new low. If the market has the ability to put in a new high then we assume that it also has the ability to put in a new closing high above Thursday’s close of 1427.59 and then more new highs after that. On the other hand, if the market puts in a new low then we have to assume that it will put in a new closing low below the closing low from 10/24 of 1408.75 and then more new lows after that.
It’s a guessing game for now but I don’t think we’ll have to guess much past Tuesday or Wednesday of next week. Also, with the election over late Tuesday and with the outcome known, the market may rally on the clarity that that resolution provides. And it probably won’t matter who wins as the market likes certainty over uncertainty every time. But there is one other thing that needs to be watched next week and that is a vote in the Greek Parliament for or against new austerity measures. Pay attention to this issue in the next few days because a failed vote will have negative impacts on Euroville and then the U.S., as well.
60min chart of SPY showing that the RSI14 has not tagged 30 and suggests that there could be further downside ahead. After getting a Bullish Cross of the 13EMA above the 34EMA on Thursday, the reverse of that is now very close. Bottom line, this is not a happy chart.
Click on the charts to open them in a new window.
Daily chart of $SPX showing the important and recent support level around 1403. If this level should fail to hold then the next important support level is down around 1397 which would be so close. Problem is that after Friday’s sell off market bias has flipped back to a negative bias and the only thing that would change that would be putting in a new high, as mentioned above. This important 1434 area just happens to be where the 20MA and the 50MA are sitting and if the market can push above them then this would have to be seen as bullish going forward as this would not only mean a higher high for this move but a break above these two key MA’s.
This chart is of the 5/10 Method and per this method one gets a ‘buy’ signal when the 5EMA crosses up through the 10EMA, but as you can see on the chart, the black line 5EMA turned south on Friday and pulled away from the 10EMA which is obviously a bearish event.
Because my analysis suggested a bounce was in the works, on Friday I added to an existing TNA position and initiated a small position in UPRO. This was before the sell off began so I’m underwater on each of these. I’m going to put a stop under these just below their recent swing lows. Maybe these stops won’t get hit, but if they do then it will mean more and more lows in the days and weeks ahead, IMHO, of course.
Even after Friday’s huge reversal of nearly 200 Dow pts and nearly 240 Dow e-mini pts on Friday, Breadth Indicators remain neutral, though near the bottom of the neutral range. Normally after getting readings in this range you would expect some kind of pause or perhaps a bounce in order for indicators to reset, and this is what I’m expecting for Monday. But this is just my guess for now and the markets will certainly let us all know their intention before too long.
Be careful. Money in the market is money at risk. And never forget that only the paranoid survive.
GL in the week ahead.