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.

Line of Death Charts

The S&P 500 and the Dow Jones Industrial Average are at support and had better hold -



These are the charts at critical support. In my opinion, they had better hold here, or there will be that much more pressure on the Indexes.

Financials, Regional Banks, Brokers


Materials


Technology


Consumer Staples



Emerging Markets, Singapore, South Africa, Latin America


Cisco, Hewlett Packard, Dell, IBM, Intel
Who says that this market isn’t technical? Cisco is sitting in a Bear Flag, right on top of the 38.2% retracement level. Next big volume move wins –either a potential retest of recent highs, or the NASDAQ breaks into a Bear Market.



Bank of America, JPMorgan, Travelers


United Technologies

Lower Tops

As Bull Markets mature, leadership narrows. What this means is that parts of the market top before others and those which top end up in a series of lower highs and lows, while the markets put in higher highs and lows.

First, I want to show the areas that are failing. The first to top tend to be the ones that get hit hardest in the next Bear Market. The first to top in 2006 were the Real Estate Finance companies and the Home Builders.

Healthcare


Utilities


Energy



Taiwan


The UK



Microsoft
That is one potentially huge top. The 38.2% retracement level (MSFT $24.90) has held and this retest of it needs to hold over the next few days, or else a large component of the S&P 500, DJIA and NASDAQ is going to be working against the market.


Others include Austria (EWO – the proxy for Eastern Europe), Australia (EWA), Netherlands (EWN), Global 100 (IOO), American Express (AXP), Mastercard (MA), Visa (V), Alcoa (AA), 3M (MMM), Chevron (CVX), Exxon (XOM), JNJ, Merck (MRK), AT&T (T)

Heavy Selling on Follow Through Day +2

First off, John Wooden passed away yesterday at 99. He was an amazing man and had deep roots in my community. I will stick with some of his thoughts today –

“If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes” – seems to be fitting these days.

“Failure is not fatal, but failure to change might be” – seems to fit going forward.

We had a Follow Through Day this week on the NASDAQ, but most of the strength that day was the result of Obama saying that the Job creation numbers for Friday would be great. Biden echoed his thoughts. You can see the move here –



The real numbers were released yesterday and they stunk, so the markets gave back all of Wednesday’s gains. You can see that the SPX made a new closing low for this move, but is stuck in a 12-day trading range. The trading range is right below the 200-day averages. A recovery above 1,067 followed by a reversal down, probably gets a lot of the asset allocation strategies out of stocks. A break above 1,103 will probably force the allocation models back into stocks –



Leadership has been in US Small/Mid Cap. They played catch up to the downside yesterday. Being on a Follow Through Day, these were the areas I wanted to buy and the setups were there, but did not trigger. Here is the chart of the Small Cap 600 ($SML). The trigger was a move above the 20-day (Blue Arrow). Mid Caps and Equal Weight (RSP) had similar setups and they failed to trigger as well.



If 1,068 is not retaken early next week, then the next set of key levels below here are SPX 1,010 and 950. Again, the average decline after a move similar to the one off the March 2009 low takes SPX down to 964. That would mean that SPX has made 60% of its average decline (about -150 points) and still has another 40% to go (about -100 points). This is not a prediction. Nobody knows the future! It is just looking at the averages of what has occurred in the past.

Technically, the markets are on a Follow Through Day, but distribution a few days after the Follow Through Day are the best way to kill a rally. It simply means that the big boys are using rallies to sell.

My goals now are –

If the markets hold these levels and the rally starts, then I want to know where I get stopped back into holdings.

If the markets take another leg down from here, then I want to know where the key levels are to anticipate a reversal and look for patterns that would get me in at these levels.

There were a lot of rumors on Friday. They all revolve around insolvent European nations defaulting on their debt (Hungary is the newest example) and the banks which hold that debt going out of business. There were rumors that a large European bank would pull a Lehman this weekend and blow up.

They call it “the slope of hope”, because you spend the whole decline hoping that somebody will save your stock market holdings from imploding. The G20 met over the weekend and Germany and the EU told Geithner and the Keynesians that they were not going to print more money and were going to cut spending. This was yet another hope potentially dashed. Things are starting to sound like a replay of 1937!

I will be posting a lot of charts tonight. I will break them down into three categories –

Leadership (holding the 200-day)
Line of Death (holding onto support for dear life)
Broken (rising wedges from lower lows)