The bears continue to dominate the field with the S&P 500 down more than 2% for the week. In what look like to be a very positive week for the stocks, the disappointing jobs report take a toll on the markets. Let's review our charts and see where the market is heading.
First, let's review the weekly ichimoku cloud chart: (click to enlarge)
Clearly the picture still looks bullish since both the price and the lagging line remain above the cloud. And despite more than 10% correction from the April top, the price has not even tested the top cloud yet. The weekly S&P 'undercuts' the optimized stop-loss line. The bottom window shows the slow stochastic is closer to extreme oversold conditions. The 10-column RSI, however, indicates the bulls are no longer in command as it now falls below the 50% level. If we're fortunate to see the S&P rallied the next several weeks, look for the 50% level to act as resistance.
Next up is the daily S&P 500 Index 10 x 3 point & figure chart:
Friday's action reversed the chart back to column of Os which means the bears are back in control. The S&P found resistance at the middle line of the Bollinger Bands. We often see the price persistently stays in the upper range of the Band during an uptrend and stays below the middle line in a downtrend. The chart shows we're now trading below the middle line which indicates to us we're in a downtrend. At this point, we should not rule out the possibility of the price testing the lower Band which is around 1,040. We do have an activated upside target 1,270 against the downside target 940. With the price now fully trading below the central line of the Bollinger Band, I expect the downside target to be achieved which in turn will completely negated the upside target. But first, we must see the double-bottom sell signal generated with a close below 1,060.
The lower window is the MACD indicator in terms of columns, not days. And it has not made a bearish crossover yet. This indicator seldom generates false signals on point & figure chart, so the bulls are safe as long it remains in buy signal. A bearish crossover would signal extreme pains ahead for investors, perhaps even more so than 2008.
I have rarely shown my readers the 2 box reversal charts, because I did not wish to confuse you. With the markets plunging hard, I must show you this chart. A careful look at this chart shows the index is looking quite bearish.
Notice the middle line in the 10-column Bollinger Band is rolling over and now acts as resistance. The upside target of 1,360 was established but never activated on the chart. It will be activated with a close above the April highs - 1,220. The downside target 1,030 hanging on the chart is activated. So with the S&P trading in an intermediate downtrend, we should be prepared for this target to be achieved fairly quickly.
More importantly, the MACD indicator in the lower window is making a bearish crossover after staying with a buy signal for more than two years. So with the bearish crossover in the MACD indicator, you must only take the sell signals and ignore every buy signals. I must point out with two box reversal we tend to get few more false signals than three points reversal charts.
Finally, the longer-term 2% x 1 point & figure chart below shows the price is barely hanging on to the 10% trailing stop. The trailing stop would have been violated had the S&P closed at the Friday's lows. The bulls are safe as long the index is trading above the trailing stop line.
As is so often the case in markets nowadays, downside targets are achieved faster than expected. While I believe it's too late to short given the market is heading toward extreme oversold conditions. It doesn't mean the market won't correct another three percent in major indices. Brave soul should heavily short on any strong counter trend rallies or once the oversold conditions is removed.
So what next for the S&P 500 Index? I have previously called for defensive stance and only recently turned positive as I believed the market is quite oversold - perhaps I'm a bit early. Could it be now time for a dead cat bounce? Perhaps we'll get a bounce after (successfully) testing the February lows 1,040 next week. Oh perhaps when the last group of bears have left the party.
Overall, I'm very concern with stock markets. We're now closed below the 12-month Moving Average which indicates bear market. This is one summer where investors wish they had taken the old saying "Sell in May and Go Away".
I realized I have taken quite a lot of your times and confused you with my thoughts. If there is only one chart you wish to carefully look at, it should be the 1-box reversal chart with 10% trailing stop-loss above. Because a close below that line would generated a very long term trend exit signal. It also means the return of a bear markets. Oh, you've got to love this volatile markets.
