Watch for the reaction...

I spent some time looking at the daily and hourly charts of the SPX. It is the one index that I am short without any form of insurance. In my recent posts I talk alot about fundamental market conditions needing to change to get our correction. Of course the issue of zero cost liquidity will not change over night, but there are other things afoot. One of the most telling events is the baby Berkshire 50 for 1 split. The release speaks of making the stock more accessible to the common investor - as if the wonderful principles at Berkshire care so much for the common man that they just have to share this incredible investment opportunities out of sheer kindness/benevolence - RIGHT! This is about absorbing cash from the suckers before it all disappears. Anyway, it is a clear signal, along with the failure of financials to surpass their October highs. The tide is turning here and market fundamentals are shifting.

So, looking at the SPX what can we expect. I begin with the Daily chart - 50 day period.



I have labeled some important features, including the rising price channel bounded by RED upper and lower lines. As I look at this channel, I note that the last reaction high of Thursday failed to reach the top trend line and may very well have put in a double top. The RSI divergence seems to confirm that observation. Also, I see that we ran the width of the channel down and touch off the bottom trend line on Friday. Though we have seen worse down moves, this was a fairly significant drop and the buying really wasn't there until the covering in the end of the day as we bounced up off the bottom trend line.

This bottom trend line happens to align with several other supports:

• 20d MA


• Bottom of the Bolligner Band


• Support Line at 1130 (tested 5 of the last 9 days)

Judging from the RSI. the recent increase in volatility (look at the expanding sticks) and continual tests of 1030ish, we may very well see a break and retest of the top of the prior range near 1115-1118. This range is highlighted in yellow on the graph. I am sure may of your remember this trading zone. The chances of retesting this range are good - as you will see that the 50p MA is sitting insider near the top of the range. Though it is not an immediate target, look how far the 200p MA is from price action. Some day, we will come all the way back and kiss it.

The Daily is good to help us get a sense of where we are within the swing and what might happen. Seems to me that we are bouncing off the bottom trend line of the channel - but support is waning, meaning we are not likely to challenge Thursday high successfully - rather, we may get a break down to 1115ish.

Let's open the hourly to see what may happen:



Oh yeah, that's much clearer for me. Note that this chart really shows the weakness setting in. This chart is for the last 20 sessions - which means it includes the holiday nonsense. When I look at this chart, I see significant distribution at the 1150 level - causing the retests of support at 1130ish. This support level also aligns perfectly with the 50% retracement of the New Year rally - which was on very little volume. Generally, when we see more than one retrace to the 50% level, you can expect a full retrace - so this means that 1115 is realistic.

Note how the price rise followed a channel before breaking out on Friday afternoon. For those of you watching action on Friday, this channel was in force. Price action did drop to the bottom of the line and paused for some time before selling pushed the break through. As is customary with breaks of channels, I would expect to see price rise to retest the bottom of the channel line before continuing lower.

I have placed a box around the 1141 zone - which is a very possible target for any pullback on Tuesday. It is a gravity zone for several reasons:

• Bottom trend line of the broken channel


• Location of the 20p MA


• Location of the 50p MA


• Center of the BB (price tends back to center

Rejection within this zone will be the signal to short for a ride to 1115. If we break above this area (say above 1144) I would expect another go at 1150 - and I would short there as well at the first sign of weakness. Using tight stops on both of these trades is advisable - as this market tends to surprise with its mysterious rallies.

I have yet to study the futures - purposely. I wanted to first get an understanding of the cash market. If I see major divergences in the futures market, I'll have to try to understand why.

Good look this week!