Did the European Summit Change the Market Trend?
I don’t often get to write to you about my market views, so I thought I’d quickly point out that I think this market rally will soon meet some pretty stiff resistance. In fact, I am getting pretty excited by the fact that the European summit managed to create a big short covering rally which has taken equities right back up into the sell zone.
The S+P 500 is of particular interest to me at the moment.
Click here to enlarge
If you have a look at the above chart (the best idea is to open it in the browser and refer to it in full size), you can see that the current price action is almost a mirror image of what we saw last year.
In 2011 the initial sell-off from ‘X’ went to retest the 200 day moving average where support was found. The market then turned and rallied from ‘A’ to ‘B’ which was the 73.4% retracement of the whole sell-off from ‘X’.
This market rally was a short squeeze that would have taken many ‘short’ traders out of their positions. Stiff resistance was met at ‘B’ and the market turned and began its plunge. It snapped under the 200 daymoving average and fell 20% in two weeks.
The current market rally is now heading towards the 73.4% retracement level at 1380 in the futures. 1373 is also the high made last year in early May 2011.
If you look at the indicator at the bottom of the chart, which is the percentage that the price is above and below the 35 day moving average, you can see that the market is entering the risky 3-5% above the 35 day moving average band (the solid blue lines) where it will often find stiff resistance in a downtrend as it did last year (I have circled the areas to look at in the indicator).
On Friday we have the release of US employment numbers. Expectations are for a fairly weak 90,000 additions. Perhaps that release will be the catalyst for this market rally to meet its use-by date, right in the major sell zone that I have been discussing.
If so it will be the best risk/reward opportunity of the year. With a potential 20% downside to come, there is the chance to make a lot of bickies if you can get onto it. Easier said than done, but it is certainly worth having a go.
Editor, Slipstream Trader.
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