"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, February 22, 2011

Looking at the Emini S&P

The following daily chart of the emini S&P shows the nearly uninterrupted rise in the S&P that has continued now since November of last year when the Fed announced that it would engage in a second round of Quantitative Easing.

In looking over this chart, I am throwing up an ADX (Directional Movement Indicator) study to analyze the "trendiness" of its rise. Recall from my earlier posts dealing with this indicator (where we used it to look at the weekly silver chart) that a rising ADX line (shown in black) indicates a market in a trend. Very broadly speaking, once the ADX moves above the 30 line, we should be alert for any downturn in the ADX that might indicate whether the trend is losing some strength.

You will note on this chart that since November, when the ADX turned higher and began rising, indicating that the S&P had entered another trending phase, it has continued rising passing through the 30 level until late last month, when the S&P put in a not quite 2% down day and what most technical analysts will describe as an outside reversal pattern. That is a pattern in which one sees a new high for a move followed by a strong move lower throughout the rest of the day that takes out the previous day's low on decent volume. Generally, the more of the lows from previous days back, that the move takes out, the more significant.

You can see on that day the ADX turned down as the market took out the lows of the previous 5 days. However, as has been the case with this market it immediately negated the bearish chart pattern, found buying and went on to blow right through the top of the outside reversal pattern day moving up another 40 points until today's strong downside day.

Back to the ADX however - it has continued to drift lower even as the market has moved higher indicating the loss of upside strength in the trend. Just as it began to flatten out and lean back to the upside and appear to be rising once again, it turned sharply lower after today's big loss. Note also that the successive peaks in the ADX are showing what we call a negative divergence.

Now we turn our attention to the Directional Movement lines, the blue line, +DI or positive directional movement, and the red line -DI, or negative directional movement. Note that since late November, the positive directional movement line has remained above the negative directional movement line , -DI, for the entirety of the move until the present. Even after today, it is still above the -DI. That indicates that this market is one which is still in a bullish posture, despite the interruption of the rise in the ADX. Were the +DI line to fall below the -DI line, while the ADX itself was falling, we could expect to see further selling in this market.

What all of this is telling me is that while the strength of the uptrend in the S&P is losing momentum, the market will still not break down. It continues to hold moving average support on the downside staying above the 50 day moving average even as it dips below the shorter term moving averages.

In attempting to be completely objective in looking at this market from a technical perspective, the conclusion is that while the uptrend continues and is losing strength, the bulls still have control at this point. For that to change and for this market to begin to break down in earnest, we would need to see a combination of several things with this indicator and chart combination.

First - the -DI (red line) would need to begin rising and the +DI (blue line) would need to begin falling and moving BELOW the -DI.

Second - the market would need to fall through the rising 50 day moving average.

Thirdly - the ADX line would have to begin rising while the first two conditions were present indicating the commencement of a downtrending move

Additionally, and perhaps more importantly, we will need to see something change on the weekly chart. Here is one last look at this thing from a weekly perspective using the same indicator and the same moving averages.

Note how the ADX (black line) is beginning to rise while the +DI is above the -DI. That tells us that from a longer term perspective, this market is entering a trending phase to the upside. Note also that the price has not closed the week below the rising 10 week moving average one time since the Fed began QE2.

If you put this longer term chart together with the daily chart you can see why the S&P will not fall apart. Dips are being bought by those whose perspective is  longer term. They are counting on the Fed to keep the liquidity spigots open. Even as the strength of the uptrend on the daily chart continues to deteriorate, the weekly chart shows that the trend is still intact.  Not until we get a confluence of both the weekly chart and the daily chart speaking with the same voice will we see a sustained breakdown in the S&P.

Meanwhile, we will wait to see how things shape up with this market and see whether or not it will once again reverse course to the upside after a big down day. The level everyone will now be watching will be today's high at 1342.50. 

I get the distinct impression from reading the speeches of the various Fed governors that even while they might take further criticism if they were to go down this path, if this stock market looks as if it is going to rollover to the downside, they will present us all with another round of QE this time with a "3" behind it.

1 comment:

  1. This market appears to be manipulated at least as much as gold and silver, as I think has been demonstrated pretty conclusively by various technical contributions at the Zero Hedge web site. The question is therefore whether technical analysis can be applied in any meaningful fashion. Applying fundamental analysis to a mixture of 500 stocks would appear to be at least as difficult. One would need to know to what extent market participants are buying the index or individual components of the index. I would welcome a comment by Dan on what the interrelationship is between trades in the index or futures on the index, and trades in the individual stocks.


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