What’s the Next Move for the SPX? Let’s Do a Little Chart Work

by Dan July 1, 2011 8:50 am • Commentary

The strength of the rally this week is something we haven’t seen in a long time, as far as volume and breadth.  The fact of the matter is traders got caught going the wrong way on this one and just as we were nervously hanging around 1270 for what felt like an eternity, investors chased the reversal and continue to do so (everyday this week) right up into the 4 o’clock close…they simply can’t get enough…..

The chart below shows the 4 day chart of the SPX. Each day this week the opening print was basically the low and each day we closed within a few bps of the high.  This is the sort of action that tells you the big boys are back and they may be repositioning for the longer haul.

[caption id="attachment_3026" align="aligncenter" width="300" caption="4 Day SPX chart Provided by Bloomberg"][/caption]


Today, marking the first day of the month, the first day of the 3rd quarter and I guess maybe most importantly one of the lowest volume days of the year historically, could be slightly telling of things to come……IN-FLOWS into equities will be the name of the game for the coming week.  If they come, and come in size, then SPX could most certainly make a convincing test of the previous highs as we approach the start of earnings season. AA’s earnings are a week from Monday, July 11th. They will be followed by Citi and JPM later that week.  As volatility continues to get crushed (VIX closed at 16.52, the lowest level in almost a month) there may be some opportunities to make some tactical directional bets in a relatively cheap manner.  Tomorrow is a day that could be easily manipulated by those who are actually around to play, and may.

The chart below shows this year’s range in the SPX. We have spent most of the time above 1300, other than the January run up and the March and June swoons….it is very likely that we will need to take a bit of a pause here and consolidate a bit before we make a move back towards the highs, but if Sovereign debt concerns relax a bit in Europe, our earnings come in OK, and economic data gets better, then, at-least superficially, it would appear that all systems are a go and we will see matched highs.

[caption id="attachment_3027" align="aligncenter" width="300" caption="6 Month SPX chart Provided by Bloomberg LP"][/caption]


I am trying to look at things objectively and separate my feelings about the health of the recovery, and what the markets are telling me.  I remained bearish on the markets right up until early this week, and frankly, Friday’s close after the short-lived rally late Thursday was anything but convincing…..to stick your toe in the water on the long side Thursday/Friday in a lot of ways could have been very dangerous.  Like I had been suggesting for weeks in my daily commentary, keep trimming shorts and taking profits on the short side because these sorts of snap back V-reversals are bound to come.  Now the million dollar question is will it stick? And frankly your guess is as good as mine…..it’s all about economic data and earnings for the next couple weeks.

I am not gonna be a monkey here and just go balls long the market, I’ll leave that to the mutual funds, but as readers of this site know I have been cutting short positions for almost 2 weeks and have been adding new, more tactical macro bets, which haven’t worked, but I stuck to my guns and defined my risk……..main point is that you have to continue to move your feet when you are right and when you are wrong.  There will be plenty of opportunities to make risk defined short bets on stocks that continue to act ridiculous (AMZN, CMG, WYNN, LNKD) and plenty of opportunities to take a shot on some laggards like banks and some boring tech names like JNPR, CSCO, ADBE ORCL.