Month: September 2010

The Week Ahead Key Levels for the SPY

Fedral Reserve Chairman Ben BernankeDon’t fight the Fed!I was watching last week’s action in the SPDR S&P 500 ETF (SPY) very closely as we had reached a critical resistance level. There were a number of technical indicators that were showing weakness and the idea of shorting the market was looking like the best bet out there.pic 5

Last week was a prime example of how fundamentals can override technicals. The momentum was looking negative for stocks going into the week started on the 19th of September and the short mindset was gaining conviction.

I jokingly mentioned that the markets would tank unless some sort of massive fundamental event occurred which would miraculously send stocks soaring out of their recent range. For the markets, the Federal Reserve’s announcement to pump more money into the system seems to have done the trick.

Now, this is not an overnight recovery announcement, but the Fed is certainly one of the most powerful forces driving world markets. One of the most valuable lessons any investor can learn is to NEVER fight the Fed.

Last Monday’s big move was a buy signal for the bulls and the shorts got squeezed out. The $113.30 level in the SPY was the key to the upside and it was breached swiftly following the Fed’s announcement. The following days, we did break below this key level, but we managed to hang on to the $112.20 support nearby and closed nicely at $114.80.

SPDR S&P 500 ETF NYSE:SPY Daily Chart

SPDR S&P 500 ETF NYSE:SPY Daily ChartSPDR S&P 500 ETF NYSE:SPY Daily ChartHolding above support at $112.20 and the $111.90 pivot will be very constructive for the bulls as we need to work off overbought conditions if we are to see a sustained move to the upside. I would hope to see some consolidation on low volume for a few days, which would make a nice base for the next leg up. Minor resistance at $115.50 should not be too difficult to overcome and we could easily see $117.70 beyond that.

There is not much in terms of economic news or data coming out this week, with the exception of the weekly unemployment claims and the ISM manufacturing PMI data on Friday. There is also Bernanke who will be testifying on the Frank-Dodd bill implementation on Thursday morning and an announcement in the afternoon. So I would expect that traders will buy the SPY at near the $112 level if possible and regroup for the next push.

This recent breakout took my a by surprise, but the discipline of being able to recognize a change when it occurs and change gears on a dime is what defines successful traders. This market will wreck you if you try to fight it and you need to keep your wits about you if you don’t to get caught on the wrong side of a trade.

Watch out for the $112 level for support in the SPY and $115.50 for resistance.

Happy trading and stay tuned.

Bullish Sentiment Is Dangerously High

Bullish SentimentThis is an important week for the markets, as we’ve got the Fed and other important economic reports coming out.

As far as the Fed is concerned, it is highly unlikely that they will raise interest rates from the current 0.25%. The statement following the rate announcement is something to pay attention to though. There will probably be some bearish comments which would further justify their easy money policies.

I want to point out how crazy bullish investors are getting right now. There is a survey done by the AAII which measures how bullish or bearish investors are and is conducted on a monthly basis.

The AAII sentiment index is reaching highs seen in three previous market crashes. This is bad news, especially when coupled with bearish technicals. When this sentiment indicator gets this overheated, the markets tend to peak. Just looking at the below chart, we can see that huge drops followed the peaks in bullish sentiment.

AAII Investors Sentiment Survey

AAII Sentiment IndexAAII Sentiment % Bearish Index

I’ve seen first hand how bullish some investors are getting. Whether it’s on well trafficked blogs or on twitter, I keep getting the feeling that there are too many bulls on steroids right now for the current situation we are in from a fundamental and technical standpoint.

October 2007 was when the Dow was trading at it’s peak of 14,200 which has not been reclaimed in the three years since!
May 2008 saw the markets drop by 6,600 points!
January 2010 was when the markets stopped just short of a correction in a few short weeks!
There is no justification for this bullishness. One report or one reading does not make a trend. There have not been any consecutive economic reports showing strong and consistent growth or significant improvement. Investors have become used to “less bad” news and this can be very misleading. If markets rally because the US loses 400,000 jobs instead of losing 460,000, and investors get excited about this, then we have some serious problems coming our way.

In this situation, prudence may be your best bet. Stepping out of the bull pen out of caution sure beats running for the gates with a stampede behind you, or worse, in front of you. Pre-emptive defensive trading is far better than having to scramble to stop the bleeding.

I don’t like being a bear, but when warning signs flash like this, ignoring them would be irresponsible. We will see what happens in the next few weeks. With volume surely to return to the markets, there should be plenty of action to blab about, so stay tuned for updates.