How far can the S&P slide?
10 July 2009
The Technical Trader’s view:
WEEKLY CHART
The full drama of the sell- off is clear. And the double attempt to break down through the 767
pivot that failed which establishes a massive support beneath the market even though there is no clear Bottom formation beneath the market – yet now look closely at the rally. We can’t help but note that if the market can find support and push back up through the diagonal joining the two highs then a massive Reversal is in prospect. But, for the moment, that is conjecture. The recent pull-back has excited the bears yet the Prior High at 872 looks important...
DAILY CHART
This day chart has a neat Head and shoulders Reversal in place. Note the minimum move
implied is as far as the Pivotal low at 820 and coincides with a fib extension. But the bulls (which we remain in the medium-term) will note the importance of the horizontal support from the prior High at 866 (the equivalent continuation support is close at 872). That has yet to break. Anxious bears should wait for a break down through 866 before getting short - or,
alternatively, use a rally back to set shorts close to the Neckline with Stops just above.
The Macro Trader’s view:
A solid rally which began in March and extended into June suddenly halted, and over recent weeks has corrected lower. Hopes that a stronger-than-expected June non-farm payroll report was a sign of economic recovery, gave way, to fears the Fed would tighten interest rates sooner than expected as the month progressed.
Thereafter, traders began searching for any evidence that would support their anxiety that the tentative recovery signs were no more than a false dawn rather than the start of a long march out of recession
But where is the evidence for the recent rush of pessimism?
Ok, July’s non-farm payroll was worse than expected, but the trend is clearly improving. But until the June report, payrolls had been declining at a rate of 550K – 640K per month and there is a clear deceleration over the last two months of job destruction.
Additionally, the two ISM surveys, though still below the crucial 50 level, continue to improve with the non-manufacturing survey released on Monday standing at 47.0.
In the housing market data has yet to turn, so far only pending home sales are up, where as new and existing home sales continue to decline.
So in essence the economy hasn’t lapsed back into recession, it continues to emerge from it even if a return to growth hasn’t yet actually begun. That leaves the S&P balanced on a knife edge.
As Q2 earnings data is released over the coming weeks, market direction will be dictated by the strength or otherwise of corporate profitability and with Q2 GDP due out also this month, traders may receive a clear directional steer.
We judge the jury is out as far as stocks are concerned. We continue to expect the US economy to emerge from recession during the course of this year and start growing again late Q4 2009, or early Q1 2010. As soon as traders feel convinced of that scenario, stocks could shake off their current hesitancy and resume the rally, but much depends short/medium term on the upcoming earnings reporting season.
Mark Sturdy,
John Lewis
Seven Days Ahead
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