Last week I said that if the S+P 500 fell below 1,598 then ‘my conviction levels will increase dramatically that further large falls are in the offing…‘
That very night the S+P 500 busted below 1,598 and we saw a very sharp fall over the next few days to a low of 1,553. My target on the S+P 500 from here is down to the 200 day moving average at around 1,504.
Longer term I think we’re heading much lower than that, but I would prefer to stick to realistic goals along the way.
There have now been some rather important shifts in momentum in US markets. I have been constantly amazed by their resilience over the past six months in the face of difficulties elsewhere, but the indicators that I like to keep an eye on are finally starting to roll over…
The first thing to note in the chart below is the fact that prices have closed below the 10 week moving average for the first time this year:
Click to enlarge
Look at the last few times we’ve seen a weekly close below the 10 week moving average in this bull market and you can see quite clearly that each and every time this indicator has presented itself the S+P 500 has had a pretty steep fall over the next few weeks/months.
While we remain in long term uptrend (10 week MA above the 35 week MA) the chances are that the stock market will revisit the 200 day moving average and then possibly bounce from there. That’s why I have that as my short term target.
The next thing to note is that the weekly MACD has now turned down and broken below its signal line. Again a quick look at the past instances of this occurring during this bull market and it’s plain as day that a shift in the MACD to the downside has been a great warning that more selling was coming around the corner.
The final thing worth pointing out (and the reason why I believe there is a lot more downside to come) is the fact that we’re having a false break of the 2007 high of 1,576. A confirmation of that false break will create a double top formation that so often signals of the end of a bull market.
The fact is that it’s not only a double top but a triple top when you see the data going all the way back to the 2000 internet bubble. A failure from this level could spell real trouble for the S+P 500 going forward.
Markets never go down in a straight line though. If you want to take advantage of a big fall in the stock market the key is to wait until other traders are ‘stopping’ out of their short positions before entering a trade.
The current squeeze higher in the share market is a perfect example. We’ve had a sharp sell-off and people are nervous. But a press conference in China that said absolutely nothing and some bad GDP revisions have increased confidence that Bernanke won’t start tapering just yet. This has resulted in a bounce over the last few days.
People who are short the market will be under pressure as the market goes higher. They won’t want to go from a winning position to a losing position, so they’ll stop out of the trade if the market runs back up to their initial entry price. This buying can feed on itself and create a sharp rally known as a ‘short squeeze’.
Once that buying is out of the way the stock market is often a lot higher than where it should be and sellers return. Since the buying was short covering and not genuine buyers, the buying volume dries up at the elevated level, and so prices then fall just as rapidly as they rose.
My prediction for the S+P 500 from here would be that the current rally will only last another 1-5 days and top out between 1,610-1,640 (with an outside chance of a move to 1660) before rolling over again and plunging to 1500.
Hang Seng Reaches Target in Two Weeks
Now let’s look at my last prediction.
On the 13th of June (two weeks ago) I wrote to you outlining some of my theories on price action and made a prediction based on where I thought the Hang Seng Index should go.
In the article I wrote that:
‘The Hang Seng is about to send the fourth long term downtrend signal and is busting down through the point of control on a weekly chart.
‘When you add up the principles above it seems pretty clear that there is a high risk we are about to see the Hang Seng fall all the way to the bottom of the range at 19,400. That would be a 9% fall from here.‘
Fast forward all of two weeks and the Hang Seng made a low of 19,395 on Tuesday 25th June and has since bounced above 20,000.
Click to enlarge
So who knows if I’ll be right about the next move in the S+P 500? Sometimes the market does what you least expect.
But the technical set up in the S+P 500 at the moment is one of the most compelling I have seen in a long time.
Editor, Slipstream Trader
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