"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


Wednesday, August 17, 2011

S&P 500 Technical Analysis

Stocks have embarked on a relief rally ever since it appeared that the Fed was going to keep interest rates at an ultra low level and the ECB was going to step in and buy up Spanish and Italian Debt. While such actions tend to keep investor fears subdued it does nothing to actually genarate true economic growth. That requires structural reform which includes looking at the tax code, cutting excessive and burdensome regulation, andgetting the central governments to actually exercise some spending restraint.

Traders are of the opinion that the Central Banks will intervene to prevent any worsening of the factors that have precipitated the move away from risk but at the same time, they all realize that serious problems are still lurking in the background and have not really been dealth with.

I am not sure what trigger might set off another round of broad based equity selling but if the market were to move back down towards the recent low near 1075 and fail to hold there, it will drop at least another 100 points before any technical support will surface based solely on the price projection given by the pennant formation.

Equity bulls really need to get the index above the 1250 level to spook the bears and preferably above the falling 50 day moving average at 1275. That seems a tall order given the state of the US economy. Perhaps the best that they are hoping for is to settle for a draw with the bears and bounce the market back and forth in a wide range trade giving the economy time to improve on its own. Then again they might be crossing their fingers waiting for Uncle Ben to give them some sweet whisperings about another dose of QE when he gives his speech at Jackson Hole near the end of this month.

Given the political firestorm that would set off, I doubt we are going to get anything quite that drastic at this point. We would need to see an equity market debacle to given them the courage to do any such thing as that would basically be the last nail in the coffin of the US Dollar. The Fed has been roundly and rightly criticized for the effect that its two previous doses of QE had on the greenback and the subsequent spike in gasoline and food prices which negated any stimulative impact that the easy liquidity might have had, if any.


  1. your wisdom and altruistic dedication to instill in others the pursuit of knowledge is truly commendable and always appreciated...

    take care...

  2. Incidentally, the pennant target of 975 coincides decently with "fair value" estimates based on a variety of empirically reliable valuation metrics (no, not the nonsense Fwd earnings crap or fed model mumbo jumbo) like the Q ratio, Shiller P/E and Hussman operating earnings methodology.

    The point? Fundamentally based investors are likely to step in despite technical weakness at this point. Charts come first for me, but keeping an eye on valuations is another valuable tool. Thanks for all your good technical work, Dan. Your site is one of my routine stops every trading day./H


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