This time is different...

Love that expression and how it has been used throughout the last year. However, for all the bears out there who have been disappointed by the tenacity of this rally - I think this time is different.

Normally, I use the chart of the SPX in my posts. Today I am using the SPY. The SPY tracks the SPX and it allows us to look at volume. Here is the weekly SPY candlestick chart.




Some important features include:

• The Main Fib Grid from the 2007 highs


• The Seconday Fib Grid spanning the reaction off of the March 09 lows


• 20p(red), 50p(baby blue), 100p(navy blue) and 200p(white) MAs


• The Fast Stochs with RSI (in red)


• Volume with 10p Average

Let me start with volume. We had an obvious spike up in volume over the last 2 weeks. In fact, it has been 12 weeks since we've seen volume above the average volume line. This is also the first time since Lehman that we have seen volume at almost twice the average line. The observation of this spike alone should cause alarm. Going further, we see that the volume in the prior 4 weeks (holidays) was pitiful. This means that any of the price action associated with that volume is very weak and hence - those gains were erased in 2 days of trading.

Now, let's look to see what else volume can tell us. Specifically, can volume help us predict support? The answer is yes. I have highlighted a range of weeks where we last saw a steady block of volume at the 10p average level of better. I found an area where buying out-weighed selling (more green than red bars). We then look at the price action in that period and see a run from roughly 88 to 108, which corresponds to 880 to 1080 on the SPX. I am happy to say that these two levels are very familiar to me, as they served as support and resistance in the past.

Looking at this highlighted volume block, we see that the only time volume exceeded the 10p Average is on a sell. That tells me that this price action is potentially soft - especially near it's top end, which is in the 1080 range. This sets up a major test this week. If we fail, the entire run from 880 to 1080 will be under attack.

What do some of the other technical indicators tell us? Let's look to the Stochs and RSI. I usually watch the stochs, but I do not consider than very reliable during strong trending markets. As you can see, they have told us that the market is over-bought for the last 6 months. A lot of good that does! It is much better to watch for divergence in the lines and for key crosses that trigger sell or buy signals. In this case, we have our fast line (yellow) cutting sharply down through our slow line (blue). This happended in a highly over-sold state. Further, the slow line shows the first real divergence from price action. Note how the last slow line top is substantially lower than the prior top while price action continued to climb. Finally, we have a reliable stoch indication that it is time to sell - and we have plenty of room to run down. The slow line can easily travel all the way down below 30 before turning back. This is a really, really bearish condition and it can not be ignored going forward. My only concern is that I do not see a substantial divergence in the RSI and we did not reach on over-bought state. This suggests the possibility of another run at the top before collapse. Look at the entire year of 2007. Follow the RSI and stocks during that final double top.

Let's move to the fib grids. First, the main grid shows me that we have essentially met resistance at the 50% retrace level. Remember, these grids are simply approximations. We do not have to hit the price down to the decimal places. We are roughly 50% back up to the top. The 50% retrace level is famous for reversal.

Next, the moving averages. The first thing I will point out is that the 50p MA remains below the 100p and 200p MAs. This may not seem important, but keep in mind that in the last 5 years, the 50p MA has always been above both the 100p and 200p average. The 50p cross below the 100p was right around the third down impulse and the 50p cross below the 200p was right around Lehman. We remain in a bearish moving average position. I will also note that price action is sitting right on the 20p MA and looking like it is going to cross below. If it does, this will be the first time that has happend since the rally began. This is a super sell signal - SUPER SELL SIGNAL. If we cross, the 50p MA becomes the target. One concern I have is that we did not touch the 200p MA - especially since the 20p MA has crossed up through the 50p MA. It is odd for price to approach as it has and turn away without a close encounter. This too suggests the possibility of another run at the high.

Now we get to a target. I have placed a box around the target zone. The top of the box roughly corresponds to the top of the range associated with the last average volume block - which is around 1080. Will 1080 hold? I don't think so. Again, I think the top is soft based on the sell volume spikes we saw during the period. Anyone who bought into the christmas rally is exiting as fast as they can. There is a sense of panic developing and I doubt the buyers at 1080 are going to try and make a stand. Their resolve was tested many times in that period, I don't see how they could stand another round of it. Though I think 1080 will fail, it will likely give enough support for a small bounce as it also aligns with the bottom bollinger band which has only been touched one other time in this rally.

Why else do I think 1080 will fail? Because it is below the 20pMA, and if we cross it will be a first and the 50p MA is a likely next target at 960. That 50p MA happens to align perfectly with the 38% retracement level of the rally off the March 09 bottom. It is also the level at which we see the first major reaction high off the bottom. It should be the "big test". If it holds, we have a correction on our hands. If it fails, we have something more signficant.

So, I am going to concentrate on a 1080-960 targer for SPX. I do not have trade setups to offer today, but I can say that the following support levels are going to be tested:

1080
1020
960

Good luck out there!