Might a Fine Crop of Complacency Be Grown This Summer? ~ The Risk Averse Alert

Thursday, May 21, 2009

Might a Fine Crop of Complacency Be Grown This Summer?

How about that... The market is trading as though many underlying technical measures were at something of an inflection point. Go figure!

Still, the simple fact indexes continue to hold up suggests the way might be paved for grinding out [nominal] further gains off March '09 bottom over the next couple months or so.

In other words, heads up...


I failed to notice yesterday the Dow Jones Industrials Average traded to a new high, post-March '09 bottom.

What's the big deal, you wonder?

Well, with all the money tied up in these thirty stocks something about the psychology driving the stock market might be usefully discerned. With a significant interest willing to pony up cash buying the widely-held, relatively-lagging, mainstay issues among the Dow 30, an element critical to a buoyant stock market becomes evident: confidence.

Apparently, in some corners broad market gains made since bottom ... glistening like a diamond ... are seen out of the windshield rather than the rear view mirror. Thus, too, new positions are more likely to be defended.

Nevertheless, given what has passed it probably is reasonable to assume any prospective market-moving interest is bound to be fragile. In other words, it must be handled with care by those cooler minds who no doubt recognize the waning attractiveness of equities in this still very disturbing macro environment.

How better to cultivate such trust as brings wallets to open than facilitate some sort of suspended animation ... something looking like a consolidation of gains made since March '09 bottom?

The Dow Jones Industrials slight reach into new high ground yesterday raises this possibility.

RSI ... remaining on the buy-side (above 50) ... bolsters the likelihood another turn higher could unfold ... taking the Dow 30 upward to its [still declining] 200-day moving average.

MACD ... likewise on the buy-side of its range (above 0) ... and appearing late-April-ish ... similarly concurs this possibility is real.


Seen in the context of the past year RSI and MACD certainly offer a very clear picture of improved underlying strength. Recently stretched to a relative extreme (indeed, registering their best readings since the market's October 2007 top), both measures appear to be regaining "balance" amidst a relatively narrow, sideways trade in the S&P 500.

Thus, might the market soon again find legs. This, clearly, has been the friendly trend since March '09 bottom. Duly noted ... and brought to light all because the Dow Jones Industrials traded at a new high yesterday.

I should say, though, something of a red flag was raised this week by the extent to which all indexes challenged their May 8th peaks. This while by some measures the market appears at a moment of truth. Could the seeming conflict be indicating support lies not much lower? Respective 50-day moving averages might mark the floor.

SPX 5-min

Might some 3-wave corrective form (i.e. a-b-c) beginning at the S&P 500's peak on Friday, May 8th be seen unfolding?

Could its "c" wave [down] be forming from yesterday's peak? Then, the 4th of its 5 waves appears to be unfolding (you see confirmation of this via RSI improvement relative to the 2nd wave yesterday afternoon). One more turn down, and an Elliott corrective wave from May 8th could be completed.

Indeed, the S&P 500 could trade 40 points lower and bottom sometime as soon as Friday afternoon. 850 is the vicinity of the S&P 500's 50-day moving average.


They say a picture is worth a thousand words...

Two lines drawn above in the RSI panel speak volumes about the market appearing at an inflection point. VIX RSI's sudden surge to 50 (coinciding with a follow-through to today's bump in volatility) seems a most reasonable possibility here.

The stock market's better than expected turn higher this week is a telling clue presented in the midst of challenging technical conditions. There's something to be said about how relatively well prices have held up despite growing technical pressure.

Further selling might be relatively muted, then.

Let's keep an eye open to the possibility that, over the next few months the market might remain relatively buoyant. Bear in mind, this does not change the outlook for a bear market-ending capitulation whose commencement would only be delayed, and begin at levels not much higher...

Fast Money
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