Stock Market Trend is Definitely Up

By: Angelo_Campione

Summary of Position For August
On July 20 we suggested a full position in an August 1020/1030 SPX Call Spread for a net credit of $0.60 on the basis that the market seemed to be getting ahead of itself and was due for a breather. We were proved wrong as the market continued higher and held its gains. Then, in the final week the market gave a decisive move, dropping 2.5% in a day, indicating that the top was in for the time being and that our position looked safe with over a 4% buffer. Even up to Thursday, it looked as though we would be fine, but Friday's burst higher meant that the settlement price on the options expiry was also higher. This is what's known as "settlement risk". We'll take it on the chin and move on.

If you entered this position, you will have incurred a loss of $25 per $1,000 of capital utilized, i.e. (2.50%) before commissions.

The official CBOE settlement price for the August SPX options was 1020.85.

Current Position:

Nil

Current Performance for 2009:

(Please note, this performance is raw, i.e. without brokerage/commissions taken into account)

General Commentary:

The system remains on a Neutral signal.

Just when you think the party is over, the music starts up again, but it's late and the partygoers are tired. Sleep is not far away now!

This latest move higher seems suspect to me, I think that we're in a classical situation where the market is looking to entice everyone to believe that it's blue skies ahead. Who knows, maybe the market will continue to rise more as the large fund managers get lured into believing that it's full steam ahead on the back of a new bull market.

For the week ahead, the path of least resistance is indeed higher but it could be a situation of, the higher this goes, the harder it'll fall.
On to the analysis..

SPX Chart - Very Big Picture

I thought I'd show a much bigger picture than usual just to give a different perspective. The above is a 10 year monthly chart with a 20 period Exponential Moving Average (EMA). Essentially, when the market is above the 20 EMA, we're in a bull market, when below, we're in a bear market.

The drop that we had was so extended that even with a 54% rise in almost 6 months, hasn't put us back into bull mode! If we are genuinely on the path to recovery, then we should see a similar pattern to 2003, although if not, we'll see a 2001/02 type pattern.

Time will tell which pattern we'll get but whichever way you look at it, the best-case scenario for the next few months seems to be a sideways market.

SPX Chart - Shorter Picture

It was an impressive turnaround last week, Monday teased the bears but support at the 975 - 980 region held and the market was able to add 5% in 4days to finish the week at a new yearly high.

The MACD is now close to a bullish cross over and there is potential for a break out from here to at least the 1050 area.

The trend is definitely up and until we can get a break below 975, that won't change. Yes, we still have the bearish rising wedge pattern but we could easily keep nudging higher for another month before this gets resolved.
At this point, we have to say that the path of least resistance is higher.

For the week ahead, support on the SPX is 975 and resistance is 1030 - 1050.

The VIX Picture

The VIX is not breaking down just yet and therefore isn't indicating that it's time to get too bullish with the markets yet.

The MACD does have potential to head south again, but while it remains pointed higher, the bears have an opportunity to catch the new bulls by surprise.

The VIX measures the premiums investors are willing to pay for option contracts and is essentially a measure of fear i.e. the higher the VIX, the higher the fear in the market place. It tends to move inversely with the markets.

Quote of the Week:

The quote this week is from Samuel Butler, "All progress is based upon a universal innate desire on the part of every organism to live beyond its income."

Feel free to email me at angelo@stockbarometer.com if you have any questions or comments.

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By Angelo Campione

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© 2009 Copyright Angelo Campione - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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