SPX Technical Analysis

SPX has Bounced off Important Support

The support line S1 has now established itself as drop-dead important support. If the SPX closes below S1 we'll expect a large drop of 100+ points in the SPX. However, we don't expect this to occur. We believe it's more likely that S1 will hold and the SPX will move up to test R1. Some of the reasons for our belief are:

• There are unfilled gaps overhead in the indexes on the 01/04/08 open (1445 in the SPX).
• Every national and Denver newscast opened last Friday's with reports of recession and the drop in the stock market.
• The AAII percent bullish investors is below 20%. The last time this occurred was April 2005 at a significant low (SPX at 1150). When the AAII and the news media strongly believe something it usually pays to believe the opposite.
• A possible Head-and-shoulders bottom forming in the SPX (see below)
• We like the fact that panicked bears couldn't push the SPX below S1 on Friday and that there was no Monday carryover of the selling.

Having said that, if the SPX closes obviously below S1 (and not 100 points below S1) we'll exit this market immediately expecting significantly lower prices.

As you can see above, the Friday low that garnered so much media attention was far from the low of this recent drop. A potential Head-and-Shoulders Bottom (HSB) has formed that would be confirmed with a move above NL at 1430. This confirmed HSB would imply a move of at least 50 points above NL (1480) which would close the 01/04/08 opening gap.

If we weren't already long we'd be buying now. So we'll hang in there long unless S1 is obviously taken out on a daily closing basis and the the drop on that day isn't 100 points below S1.

NDX Technical Analysis

NDX Testing Support S2

Last time we said, "The NDX appears to be testing a fairly well defined uptrending support line S1. If S1 fails we expect a drop to S2.", which is exactly what has happened. At this point the NDX needs to remain above S2 if the general market is going to move higher from here.

NDX Relative Strength (NDX-RS = NDX / SPX)

NDX-RS is in a slight downtrend resisted by R3 which implies that the NDX is likely to underperform the SPX and therefore it's not a good time to take on NDX risk.

At this point we will not take on NDX risk.

RUT Technical Analysis

RUT Due for a Bounce.

The RUT should find support at S2 (680) which is the level of old tops and bottoms. But if the RUT does bounce off S2 and then takes out S2 to the downside a large Head-and-shoulders Top (HST) will form implying significantly more downside in the RUT.

RUT Relative Strength (RUT-RS = RUT / SPX)

RUT-RS has been in a very well defined downtrend over the last couple years that accelerated downward in 2007.

At this point, we see no good reason to take on RUT risk.

XAU Technical Analysis

Head-and-Shoulders Top (HST) in the XAU, a Complete Failure

We've always said that the XAU is noisy and is prone to false signals. The HST confirmed in Dec07 was a failed signal and the XAU has moved higher. We almost never chase markets and certainly not the XAU. So we'll be watching for some guidance in this market, perhaps a drop to S1. Luckily, our mechanical gold systems have been performing magnificently.

We have no plans to consider XAU related long positions with our accounts not managed by mechanical methods until the XAU chart gives us something useful.

On 11/15/07 here we wrote about the bullish RSD buy signal during the seasonally bullish month of December. Sure enough this buy signal occurred on 12/18/07 and captured a 4.9% move in the NDX in just four days.

The ULTRA Timer Report (UTR) in 2007