The market indexes are testing resistance at recent highs after rebounding from support at the 200-day moving average. If this resistance area holds, we should expect the market to turn back down.
This is a monthly chart for the S&P 500 showing 20 years of performance. Since this index is the one used by professional traders, it is important to understand how it is performing. This chart is also excellent at defining the longer term trends for the market.
The end of the bear market and the stock market bottom came at the long term rising trend. Shortly after the monthly Slow Stochastic rose through 20 then the MACD rose through its 9-month moving average. Finally, the RSI climbed through the 50 level, though it is testing this bull-bear market indicator now. Most recently, the S&P 500 crossed through the 24-month exponential moving average. As long as it remains above this level, a bull market is in place.
In June 2010, the market fell through the 24-month exponential moving average. This week the index closed below the 24-month EMA, indicating the rally is over and a new move down is possible.
Presently, the RSI is below 50 a sign of a down trend. The MACD is trending up. Monitor how it handles the zero level to get an idea of the strength of this move. If the MACD turns down through its 9-month moving average it will be a sell sign. The Slow Stochastic is pausing at the 50 level, a potential resistance area. If it turns down it will be another sign of a new bear market.
From a monthly chart perspective the rally is faltering. Any further move down from here will indicate a new bear market is beginning.
For now, I intend to invest as though we are in a market that trends sideways in a wide channel in a trading range (1,400 - 1,200) that will be the dominate pattern for 2011. This will give us opportunities to buy at low points and sell at high points, meaning we will be trading more this year.
You can click on this Big Picture S&P 500 link below to see a current version of this chart.
The four-year weekly S&P 500 trend chart shows the rebound from support of the rising trend; a trend that began in March 2010. Recent volume has been at or below average, a sign many investors are not participating.
A test of the 1,360 area, the recent high is underway. If this holds, the market will turn back down. Should volume pick up and the S&P 500 push through this resistance level, the rally has a chance of continuing. There is resistance at the 1,430 area.
RSI is above 50, a sign of an up trend.
The MACD has reached a high point where it turned down through the 9-week moving average, giving a sell sign.
The Slow Stochastic rose through 20 giving a buy sign. If this indicator continues to rise, we have another sign of strength in the market. Should the Slow Stochastic turn down at the 50 area, it will be a sign of weakness.
The weekly chart pattern indicates the S&P 500 continues to trend up. The rebound at the ascending was a positive sign. If support at the rising trend fails, expect the market to trend down over the intermediate term.
You can click on this S&P 500 Weekly Chart link below to see a current version of this chart.
The S&P demonstrates a useful learning pattern. The attempt to push up through the resistance at the 1,350 area in the middle of May failed, a sign of a new move down. This move up formed a lower high another indication the market was about to fall further.
The 200-day moving average held as support telling us the market would rally.
These are excellent chart patterns that help identify the market trend.
Now to the present. The S&P 500 is attempting to climb through resistance at the 1,350 area. The 1,365 level, the recent high offers another resistance area.
Volume remains at or below average, an indication that many investors remain on the sideline. We are looking for above average volume to help power the market through the current resistance levels.
RSI is above 50 a sign of an up trend.
As expected the MACD rose though its 9-day moving average giving a buy sign. This indicator is in a steep climb that will turn down in the near future.
The Slow Stochastic is approaching 80. When it rises above this level it will turn down giving a sell sign eventually.
The slope of the 150-day moving average is another important indicator. When it slopes up it is telling us the trend is up. when it points down the trend is down. Until the last few days the slope of the 150-day moving average was up. Now it is flat. If the market can move above the 150-day moving average, we can be assured the slope will remain positive. We will watch this carefully.
A head and shoulders pattern has formed, a bearish formation. If the index falls through the 1,025 level look for a drop to the 900 level based on the measure rule.
The test of the 1,365 area will be important in determining the future trend.
For 2011, I am expecting the market to trade in a range 1,400 area as the high 1,200 as the low.
This link S&P 500 Daily Chart will give you a current perspective on the S&P 500.
Given this analysis of the S&P 500 trend line charts, it is important to position your portfolio for a market that is more likely to trend in a range with cyclical rallies and pull backs.
Selecting the right sectors and stock picking will become more important to your success. Look to buy on dips in the market to important support levels. Then add down side protection at interim high points using trailing stops and protective put options to help improve the overall return.
The charts of the S&P 500 trend lines provide a good way for investors to align their portfolios with the overall market trends. Picking the right sectors and stocks will become even more important. Look to buy on dips in the price of the S&P 500 trend charts on the next pull back.
Be sure to use proper capital management techniques including trailing stops, protective put, covered call options and position sizing. When the pull back ends, look to add to long positions with stocks and ETFs from the sectors that are likely to outperform the overall market. Keep in mind, Warren Buffett's first rule of investing is to not lose money. Be patient waiting for good entry points.
As of the end of June 2010, our Stock Portfolio was up 7.2 percent and our sector portfolio was up 5.4 percent. The market as measured by the S&P 500 was essentially flat.
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