Jul 23, 2012

S&P500 downtrend confirmation

Summer rally proved to be short lived and without volume support as most of the public is out for a vacation. However the markets don’t go to summer holidays and we are witnessing that consequence at the moment.

Recent rally was undermined by numerous factors. First, disappointing Chinese growth data sent markets south, second newly refreshed Euro skepticism over debt problems resolution have led to brief selloffs.

On the technical side the S&P500 index (SPX on the chart) is showing really disturbing signals lately. First to mention is the fact that we got fresh new lower highs, which suggests negative trend formation. Another worrying fact is the divergence between the index and the histogram of the moving average convergence divergence (MACD) indicator. This point to trend reversal and, as history shows, it is seldom wrong.

How deep could markets drop?

Based on the previous bottom registered at beginning of June and latest peaks we have built parallel channel pointing the bear move. Using 2011 bottoms as reference the support range between 1200 and 1240 is the target area, some 6 to 10% drop. However if there is strong monetary or political sign for support the markets could find ground and rally briefly. For trend reversal we would need more persistent policy action.

Based on current unfavorable macro environment, which suggests sluggish growth worldwide, and mentioned technical indicators we could say that new bear market is knocking on the door.

S&P downtrend confirmation
S&P downtrend confirmation
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