One month ago I was quite doubtful whether this market had enough strength to overcome the strong pessimism that was setting in.  The market seemed to struggle to make even a meager advance, and when it did, it would give it all back and more in subsequent days.

But last month was very constructive.  In contrast to May and June, we saw multiple days in which the market made large advances, retracing back very little (up over 11% since the June lows), to the point that we are now back above our long-term moving average and still moving upward (the Dow was up another 205 points today!).  Our next goal is to move above the June high of 1131 and then to surpass the April high of 1220 (we are currently at 1126).

Although the market has made an impressive move in July, we must recognize that there has been significant selling in May and June.  From this point on, we will either see continued movement forward or we may be just “setting up” a minor peak for the next down move.  It all depends on where the market begins to stall on the way up.  As always, we remain cautious even as we move upward.

My reason in writing so soon after my last post is that the recent up move may easily lull us into complacency.  This is still a time to be very cautious as we are still hovering below our long-term moving average and as of today the S&P 500 is resting right on significant short-term resistance at 1070.25.

As I’ve said before, the market must continue to move up aggressively with additional big up days over the next several weeks if we are to maintain any confidence in it.  If we should see sellers come back in force, it will negate the recent move up and it will be time to bail.

As late as mid June we still held out hope that this market had a chance of recovering, but by the end of the month it has become obvious that this market is really struggling.  As of yet, the market internals are not showing the classic divergence patterns one usually sees at market turning points, but in the end we don’t trade market internals, but price itself.

In the weekly chart above (click on chart for higher resolution) we see the fast moving average (blue line) is below the slow moving average (red line) and has been there for several weeks.  A short lived feeble attempt to go back up in mid June has failed miserably in the last two weeks.

The position we find ourselves in right now is almost identical to that of December 2007, just after the market had peaked in October – the main difference being the market internals.  As you can see from the chart, we peaked in late April and have moved steadily down from there.

On July 1st we came very close to a natural point of support where we got as low as 1011 (support is at 1008). Currently the S&P 500 closed at 1022.58 on Friday, so we have seen a slight bounce which could lead us higher for a while.  If we are to have any confidence at all in this market, we must see a renewed interest from buyers who will move this market upwards very swiftly, accompanied by heavy volume, in the coming week.

If we continue to move down next week, it will be time to switch over to SDS etf, which moves inversely to the S&P 500, seeing that our next level of support is not until the 943 area.  As always, caution is the byword.

NOTE:  I have recently made a change to one of the parameters of the longer moving average line so that it will tend to give earlier entry and exit signals.  Use the following link to produce a weekly chart of the S&P 500 as the one shown above.

http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=3&mn=0&dy=0&id=p72981540704

We find ourselves at a very important juncture in the S&P 500 index.  As of today, our short-term moving average (blue line) is now touching the long-term moving average (red line) and if we are to continue to see the market advance further, it needs to do so from here and quickly.

On May 25th, the market made a low of 1040.78, which is lower than the previous low of 1044.50 made in early February (down-sloping green line).  Although this is not a significant amount lower, it is an early warning sign of potential weakness ahead.

The market internals are not yet giving clear indications of a downturn, which gives us optimism that higher prices are still ahead.

Now is when we will be alert for any further market deterioration and begin to consider moving to SDS etf if it is warranted, but for right now we will continue to hold our SSO position.

What a day!  Everything was looking relatively normal until noon Central Time.  Although the market was down up to that point, I would classify it as an orderly move.

After noon, the market seemed to become more erratic with larger moves to the downside.  At around 1:30 pm a snowball effect began which caused the market to record its greatest intra-day move in history.  The Dow Jones Industrials moved from a high of  the day at 10879 to a low of 9869 – just over 1000 points, with 740 of those points coming in a twenty minute time frame!

As amazing as that is, what truly sets this day apart is the rebound the market made as huge volume of sellers turned to buyers and the Dow recovered 650 points by the close.

The classic interpretation of a day such as today is called a “Key Reversal Day” – as we made a huge move to the downside and ended up recovering a large part of that move, on a day that saw very large volume.

Although it may be premature to call this a market reversal (if we go lower than the lowest point today, then the reversal day is negated), we see the classic signs in place.  What made today unusual is that these types of intermediate moves against the trend usually take about four to eight weeks to unfold, whereas this market has made a precipitous move in only eight trading days!

As we observe the market internals, it still appears that we ought to continue with an uptrending market, but as I have said before, we always maintain a cautious stand.  We also note that we moved down well through our 200 day moving average, but recovered well above it to end the day.  Also note that as of yet, we did not go lower than our most recent low from early February of this year.

Going forward, we will need to eventually move above our last high of 1219.80 on the S&P 500, recorded on April 26, in order to keep the uptrend intact – we closed today at 1128.15.

This market shows no signs of stopping even though we experience normal pauses on our way up.  Our previous peak in January reached the 1150 area – this has now been eclipsed as we moved above 1200 in April.

So far SSO has performed well – a 54% gain since initiating a position last July as of the market close today.

As we can see, the S&P 500 is still in advance mode after we took a little dip in early February – so far, it looks to have been a good buying opportunity.  What we need to see now as additional confirmation, is for the S&P 500 to get above its most recent high of 1150.45 we saw in early January (we closed at 1149.99 on Friday).

As mentioned in a previous post, this happens to be near a stronger area of resistance so it will be significant for us to get above this level – if we stall here it would not be a good sign.

On a side note, I was doing some calculations and noticed that for anyone who got in SSO last July, would now be looking at a 40% gain over the last eight months – not too shabby.

In my last post I mentioned the weakness that was apparent in the market based on the lack of volume, while prices were moving higher.  The next day the market hit a high and then came tumbling down (I admit it was a lucky call).

For anyone who has been in SSO since last July, this should be seen as a normal correction in an advancing market (recall that we had a similar down move last June).  Remember that as long as the 20 day moving average is above the 200 day moving average we will still consider this a bull market (click on chart for better resolution).

For those who are more aggressive in their investment approach, this may be considered a good buying opportunity, although be aware that we can come down even further from these levels.

We will keep an eye on the moving averages to determine our course of action.

Last August I spoke about the volume in the market making us question the upward movement we were experiencing, as I would expect a strong move to be accompanied by strong volume.  After the summer months, I was expecting market participation to increase and as a result, an increase in volume.

As you can see from the chart, although the market has gone straight up since last March, we have done so on steadily decreasing volume.

If I expressed caution back in August, then I must be even more cautious now.  It appears to me, that this market is being “propped” up and unless we see volume come in, it will be very difficult for this move to be sustained.

In my last post I discussed the possible outcomes caused by the divergence we were seeing between the market internals and the S&P 500.  It seems that the market has chosen a sideways path, moving in a relatively tight range.

Although this activity does not increase the value of our investment, it does serve a very useful purpose.  As we know, the market does not go straight up or down, but often takes a break from its’ primary trend (currently up) and retraces back some of its’ move.  Many times, these retracements end up being excellent opportunities to add to our current position.

NOTE – in a previous post I mentioned the possible resistance we might experience as the S&P 500 approached 1121.  Today 1121.58 was the high of the day.  Although no one knows what the market will do, we are always aware of the pitfalls along the way.