Alright, guys. Let’s get down to business. The bulls had a very good day today, recapturing the 20 day moving average and the psychologically important 1200 level. Above all else, I continue to stay open minded and nimble, with high levels of cash. I am not an ideologue and hopefully never will be. I do not care about labeling myself a bull or a bear. I simply trade to make money. If the market follows through to the upside, I will quickly look to the long side for a swing trade. If, on the other hand, today proved to be mere end of month window dressing and we fall down hard, then I will increase my short exposure.
I am going to show you two charts of the $SPX. The first chart, immediately below, includes several indicators such as the RSI, MACD and Full Stochastics.
First of all, note the significance of the 50 level on the RSI at the very top of the chart. Generally speaking, bull markets stay above 50. If we break below, it usually signals a deeper correction than a mere 2-3%, as was the case in late January/early February. 70 is overbought territory, whereas 30 is a very oversold zone. Keep an eye on that 50 level to see if it holds. The bulls were pleased to see it hold today.
Both the MACD and Stochastics, however, are bearish and sloping down with no imminent crossover apparent. Thus, we have some conflicting signals. Frankly, that makes sense after today’s move up which put us back into a short term neutral range. Keep in mind that price and volume are still your bookends for technical analysis, but it does help to use other indicators when there is indecision in the market as to where the next intermediate term move is going to be.
The next chart is my usual annotated one, updated daily for you:
As you can see, we are back to being in a short term neutral range. The channel of the rally since February has been breached for several days now, which is why I did not include those trend lines today. Instead, I thought I would focus on one possible–repeat, a mere possible–outcome that we may be forming a bearish megaphone top, with higher highs, but lower lows. This is a function of the kind of volatility that you see at market tops, with a heated argument between the bears and bulls that is eventually resolved to the downside. Keep an eye out for that. Volatility is a friend of the bear. The bulls, instead, want to see quiet consolidation after a nice move up.
Of course, after a day like today, there is always the possibility that we get a “V” shaped bounce back up to new highs. The bulls have pulled off that kind of quick recovery whenever it looked like we were going to fall over the cliff each time since March, 2009. Hence, due to this conflicting evidence, I remain content holding a very high (50% +) cash position here. As I have said before, I do not look at reward alone, but rather I always look at it through the prism of risk.
I really wish I could give you guys an easy answer about whether the next big move is up or down, but the reality is that if I did that, it would be pure gambling at this point in time. We have seen a spectacular move up both from March 2009, as well as from February 2010 to where we are now. I believe we are in a cyclical bull market, but you still have to respect the fact that, even during those great bull runs, the market corrects in a take-no-prisoners manner from time to time.
Until the market reveals more about where it wants to go….
My Top Pick: Cash