Lets go to the charts. As the S&P 500 (SPX) is trying to find a bottom, its my view that technical analysis could be very instructive. After spending the better part of this past year banging around between 1250 and 1350 the SPX may have done what it needed to do technically to shake out some weak hands and set up for a test of former support at 1250. The chart below shows the 10 day action in the SPX and clearly demonstrating an attempt at a bottom, looking very much like a head and shoulders formation:
Looking at the one year chart below, the panic low on Tuesday was just above 1100, which was basically the point between the level where QE2 was suggested in early Sept 2010 and the time in which the program began in Nov 2010. The chart below shows the almost 19% sell off in the SPX since early July, and the prior support level of 1250, now very clearly a huge resistance level……If we can get through 1250 on the upside we are likely to hold that level for some time, but that would be a big IF given the current macro environment.
A 50% re-tracement of the downward swoon since July would be about 1225, right below resistance, so while a test is certainly in order it will likely take the sort of stimulus announcement we got last year around this time for this to happen….
This may sound obvious, but spot VIX is likely to stay elevated for some time until we start to see greatly diminished intra-day moves in the overall market…..I mention this merely because many look to the VIX as a predictive indicator which may not be that useful in determining where we are going short term. Single stocks are moving around not just with the market but on stock specific news……for a company the size of CSCO to be up 16% yesterday following a lackluster quarter merely tells me that sentiment got overly negative and shows of bullish euphoria seem to be more out of desperation than fundamentals.
Lots of goofy things are going on in the markets that remind us of 2008…..Some European countries are taking the useless step to ban short selling for a couple weeks…..ugh this was the sort of interventionist crap that doesn’t help the confidence of investors in my opinion…..merely shows how fragile things are……
The other day I stated in my morning note that when we bottom we are likly to rally at least 10% from the low, and that looks like it is in the cards, the real question what to do next…..I think it is safe to say that there will be plenty of good companies left behind and you will have opportunities not to chase the beta names…….
So I guess the fix is in and barring any news out of Europe we are likly to float higher towards 1200. A close above 1200 would be fairly bullish in my opinion and a consolidation around that level over a week or so could signal some stability. As we get further into August volume should dry up a bit and that can go 2 different ways, 1st less liquidity equals greater volatility or 2nd we just compress and investors do very little after exhaustion from the last month……