Oct 22, 2009: Signs of an intermediate top

  • Thursday night email to some fellow investors
  • 1-month SPY chart rollover signs
  • More ominous signs
  • Thursday night email to some fellow investors

    The following is merely an intermediate-term observation, it is not (yet) a call for the end of the present bull run which started on March 9, 2009.

    A monthly chart of SPY

    Look at this (20 trading days) chart of SPY (the S&P500 ETF). Note especially the last 4 days in this 1-month picture.

    [click for full-size 154KB image]

    We had a fantastic 3 week run into earnings season with over 3 out of 4 of companies beating estimates, but it looks like we are getting very tired. Dow 10,000 notwithstanding, the S&P500 hasn't really moved up much this week. Plus many great earnings releases are met with fierce dumping by the big smart money because all the great news is already "priced in."

    The Accumulation/Distribution + Intermediate Momentum and short term RSI(2) lines in this picture tell me that 110.36 may have been the intermediate intra-day high for SPY and that we may be rolling over in the intermediate-term.

    The only 2 disagreements are the huge volume on yesterday's dip and the fact that AwesomeOsc is still rising. However, if tomorrow (Friday) we fail to break the previous high, then I feel the next 20-day 2sd resistance point at above 112 for SPY is out of reach for this intermediate cycle. Instead: SPY should break down without getting close to it.

    If this comes to pass it means the next stop is 107.30 on SPY, and probably lower with a possible new test of the 50-day EMA. Similar to the correction we had at the beginning of October.

    I also note that 4 US futures are already markedly down from their post AMZN earnings euphoria levels (/ES /NQ /YM /TF on the left pane) and that MSFT announces tomorrow morning (and may well be a dud). [Update: I was wrong on the last hunch: MSFT turned out not to be a dud. They've beaten a very low expectations bar and went up. That wasn't enough for cheering the markets up, because of the huge run up that preceeded the news anyway]

    More ominous signs

    Some more signs for impending weakness can be found in some comparative analysis.

    The fact that URE (real-estate 2x) which was generally a leader since March didn't come even close to its previous (6.38) high AND that XLF (financials) have topped on Wednesday over a week ago (@ 15.89, prior week, Wednesday after hours), and both failed to make new highs with S&P500/NASDAQ/DJI this week, means we have a pretty clear negative divergence: financials and real estate are giving-up their leadership for now.

    The bottom line of all this is, if you didn't participate in the great September and October run ups, now it is a bit too late to "get fully invested." This is true even if markets make another small run up to 111 or 112 in SPY.

    Of course, I may be wrong (as always) - but I think the downside risk is now bigger than the upside and I'm taking a intermediate-term (week to a month) bearish/defensive posture.

    As always, this isn't intended as investment advice. It merely reflects my own thinking and actions at the time of writing. In the immortal words of John Maynard Keynes "When the facts change, I change my mind. What do you do, sir?"

    Every investor should make up his own decisions based on his risk tolerance, comfort-zones, convictions, and understanding.

    Any feedback is welcome.

    -- ariel