Stock Market Trend Rubber Band Effect

By: Angelo_Campione

General Commentary: - The system remains on a Neutral signal.

Things have changed somewhat this past week, while we were expecting a consolidation and possibly a short sharp pullback, the market went on to make new highs and even closed at the highest point so far this year.

While on the face of it this is a bullish development, in the short term we're very susceptible to a sharp move lower. I've spoken about the rubber band effect before where prices get stretched too far one way or the other and eventually they spring back, just like when you let go of a stretched out rubber band.

While some indicators are presenting themselves similarly to the March break out, we don't have the same conditions that lead to the catapult in March and therefore it's best to be wary of this move and stay on the sidelines if you're in cash.

At this stage the medium term is looking bullish but depending on how the next down phase plays out, that picture could change.

For the week ahead it is possible that we go higher and hit 1000 on the SPX as more companies announce higher than expected earning, however at some point the reality of what a reasonable P/E is will kick in and at that point the rubber band may get stretched to the downside again.

On to the analysis...

SPX Chart - Bigger Picture

Now that resistance at 950 has been pierced, the SPX is shooting for the 1000 mark and that could happen this week. If we can then get a quick little breather in the short term down to at least 930, the SPX should then have a good basis to continue this run higher.

The MACD continues to look positive and as long as it doesn't cross lower, the bulls will remain in charge.

The V pattern drawn on the chart indicates that any dip we do get should be contained by the uptrend line at around the 900 level.

SPX Chart - Shorter Picture

The shorter term shows an interesting convergence at around 990. It coincides with the line of previous highs, the upper line from the trend channel and the steep mini uptrend line. All this seems to point to a good point for the market to reverse possibly on Monday or Tuesday this coming week.

Also note the mini bearish wedge that's developed in addition to the overbought RSI. The MACD remains positive and isn't indicating a break down yet.

For the week ahead, support on the SPX is 930 - 950 and resistance 1000.

The VIX Picture

The VIX continues to be firmly in a downtrend although we're now on the bottom of the channel, which supports the potential for a reversal early in the week. We also have a bullish wedge that adds some weight to this scenario.

Finally the MACD seems close to turning higher, which again adds weight to a possible reversal by Tuesday.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place. It tends to move inversely with the markets.

Current Position:

The current position from July 20 is a full position in an SPX August 1020/1030 Call Option Spread for a net credit of $0.60.

The premium received if you entered this trade is $60 per $1,000 of margin required per spread (before commissions).

In relation to our open position, we have 4weeks to expiry and only 40 points from the sold strike. Clearly this isn't as comfortable as we'd like to be but with the next level of resistance just above us, lets see what happens here.

Current Performance for 2009:

Quote of the Week:

The quote this week is from Joseph Campbell, "Money is congealed energy - and releasing it releases life's possibilities."

Feel free to email me at angelo@stockbarometer.com if you have any questions or comments.

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By Angelo Campione

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© 2009 Copyright Angelo Campione - All Rights Reserved
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