A Potential Double Bottom or Wash Out

I keep looking at the Line of Death charts and recognize that the markets are at a very key level. Yesterday, the SPX touched 1,042 held (actually it went up 1.53% in about 30 minutes). Somebody (the FED?) is defending price right there.

The line at 1,060 is important, because it gives you a visual reference for where the equilibrium is between buyers and sellers. One camp will win out and the markets will make their next big move, either up or down.

SPX 1,040 is important because it was the low of February and the low for the November 2009 rally.

SPX 1,100 is important because it is where the 200-day average is and this is the average that drives the decisions of so many market timers (price above = buy and hold, price below = sell and hold cash). The powers that be understand that a move below 1,040 forces still more money in these models out of stocks and into cash.

This is only my opinion, but as long as the lows of May hold, prices have a chance at bottoming here. If the lows fail, then I become focused on the 38% retracement level (SPX 1,010) and the 50% retracement level (SPX 960). I think the markets will either find their footing here and rally or fail here and find their footing at either of these two lower levels.



So I have to treat this as if it may be a bottom. The old saying goes – you have to buy a bottom, because you are not certain as to whether or not it will turn into THE bottom. If the markets do bottom here and I miss putting some money to work then I will be forced to chase it and make emotional decisions. If they fail here, then I run the potential of taking a small loss and trying again at lower levels.

Nobody can tell the future, but they can prepare to look for bottoming patterns at obvious support levels. This is potentially one of them. There is a time cycle next week around June 14 – 16. The markets have been very technical, so I will be on alert for any plunges or reversals up.

Equal Weight, Mid Cap and Small Cap have been holding up the best. They will be my areas of focus. The great thing about corrections is that they let you sell what is failing and move your money into leadership.



Here is a chart of how potentially volatile the current markets are. This is the Reverse Symmetric Triangle pattern. It is one of the best potential reversal patterns. This chart is the Large US Energy stock ETF (symbol XLE). The trigger is a close above the high of the low day, but that would have gotten you in at $54, so the trade was not taken.

XLE has been consolidating for 14 days in a triangle. It can break up or down. I don’t know the direction of the break. I only know that I expect it to be a violent move on way or the other. My entry point today was a move above the 20-day near $53.30. Price failed to get there, telling me that the big boys were not yet ready to move the price of XLE out of the consolidation.

If XLE breaks down from here, then I look for another potential entry at lower levels.



Financials (XLF) are extremely important to the markets. You can see that $13.90 has been tested three times in the past few weeks and a break below will probably test support at $13.50. That $13.50 level had better hold, for if it breached, then prices had better snap back above it very quickly, or the markets will probably be in very deep trouble.



Semiconductors (SMH) need to hold $26. It has held here on numerous occasions since the beginning of May. Semiconductors lead, they do not follow and if they fail here, that just adds to the evidence that the Economy is in big trouble.



Prices aren’t all at risk of breaking support, the US Treasury 7-10 year ETF (IEF) is on the verge of breaking out to new highs. Or it may be setting up a double top.



Natural Gas (UNG) may have finally found a bottom, with Crude now on the Government’s hit list.



Here is an energy company that is actually on the brink of new highs! VQ doesn’t have much volume, but it is in the IBD Top 100. Just be ready for the potential of a 40% drop in about three weeks. I am not recommending anybody buy it, I am simply showing a pretty picture.



Here is a Gold stock that looks like a Cup & Handle. Again, I think it is a pretty picture and I am not recommending you do anything with it.



So, the next few days may see a resumption of a violent trend. The only question is will the trend be up or down?

One last thing. I want to show the charts of some High Yield bond funds. They have pulled back with stocks and may be an early warning of a reversal or validate any future weakness. I will be watching them closely.