If you've read any of my articles before you know that I have a mini obsession of reading (and quoting) headlines. As a contrarian, I always like to have a pulse on the media's outlook because it can provide valuable contrarian clues.
Here are some of the headlines featured last week:
'Greek default could trigger chain reaction' - AP
'Why Wall Street still says buy, and you shouldn't' - AP
'Is the bull market over?' - Barrons.com
Interestingly, the Barrons.com article commented that: 'A look at four different sentiment measures suggests that more pain may await investors.'
I looked at similar sentiment measures and my conclusion was just the opposite.
Bearish Sentiment Extremes
By last Thursday (June 16) the market had recorded a number of bearish sentiment extremes. The most notable was the CBOE Equity Put/Call Ratio, which spiked to the highest level since early 2009.
Bullish sentiment captured by the AAII and II polls had also dropped significantly. In fact, the percentage of bullish advisors and investors was almost as low last week as it was in the summer of 2010 when the S&P was just barely above 1,000.
The VIX (Chicago Options: ^VIX) was the only sentiment gauge that wasn't in dangerous territory. However, the VIX set up to trigger a buy signal for stocks on Wednesday (June 15).
The chart below featured last week by the ETF Profit Strategy Newsletter on June 17, neatly summarizes the various sentiment indicators. The Newsletter's simple conclusion was that: 'Things might be so bad, it's actually good.'
Support Levels
Sentiment gauges are valuable, but basing decisions merely on sentiment can be dangerous. For that reason, the ETF Profit Strategy Newsletter always looks at structurally important support/resistance levels.
Here are some of them mentioned in Wednesday's (June 15) Profit Strategy update:
1) A trend line originating at the March 2009 low 2) Fibonacci support 3) March 16, 2011 low 4) 200-day moving average 5) Weekly pivot support
All this support was clustered between S&P (SNP: ^GSPC) 1,259 - 1,245, and the Newsletter recommended to close out short positions (established when the S&P reached the Newsletter's upside target at 1,369) and leg into long positions as soon as the S&P entered this range. It did so on Thursday, June 16.
Bullish Dow Theory Non-Confirmation
In the week of June 13, The Dow Jones Industrial Average (DJI: ^DJI) dropped to a new 3-month low on Wednesday (June 15), while the Dow Jones Transportation Average (NYSEArca: IYT - News) recorded its low previously on Monday (June 13). According to Dow Theory, this is bullish as long as the Dow Jones Transportation Average does not fall below 5,043.21 and not close below 5,072.58.
Another bullish non-confirmation was found between the DJIA (NYSEArca: DIA - News) and the S&P 500 (NYSEArca: VOO - News), Russell 2000 (NYSEArca: IWM - News), Nasdaq Composite (Nasdaq: ^IXIC), and Nasdaq-100 (Nasdaq: QQQ - News). The senior DJIA was the only major index that did not fall to a new low on Thursday (June 16).
How High Will it Go?
The key question now is whether this rally is merely a bounce within a new bear market or an attempt to reach new highs. The assessment made on June 15 was that: 'The current trading range is seen to be between 1,250 - 1,300.'
Before the S&P moves above 1,300 it must overcome Fibonacci resistance at 1,300. If it can't break above 1,298 and instead falls below 1,284, there will likely be another bout of selling.
How to Profit in this Market
Let's The key question now is whether this rally is merely a bounce within a new bear market or an attempt to reach new highs. Yesterday the DJIA broke above the confines of a trend channel that kept the DJIA in check since early May. This is near-term bullish.
The S&P moved above Fibonacci resistance at 1,298. This is also near-term bullish. The next obvious but not only target is the 50-day moving average at S&P 1,317.
Slightly above the 50-day SMA are two Fibonacci resistance levels. How the S&P behaves at those levels will very likely determine whether the current rally will lead to new highs or to a sharp summer sell off.
No comments:
Post a Comment