SPX Technical Price Analysis

SPX Still in Uptrending Channel

The SPX remains in a very well defined, low volatility channel that is about 50 points (~4%) wide. A break out of this channel in either direction would likely result in at least a 4% move above or below the channel. In the case of a downside break, we'd expect a drop to S2 setting up a wider channel bound by S2/R1.

Considering that most of the moves down to S1 have had at least one rally attempt back to R1, it's likely that we'll see another attempt back up to R1 which will probably fall slightly short as that has been the norm for the last couple months.

Another clue pointing to a short-term rally is the bullish April end-of-month period (see below).

Long Term Bullish

We've been stating for the last year that we are very bullish for the long term. We remain bullish and would not be surprised if the SPX equals its 2000 high this year or in early 2007. Our main reason for this bullishness is the huge Head-and-shoulders bottom in the SPX chart which implies an eventual run to 1600 or higher.

As we've said before if this all-time high occurs it may set up an extremely major top. Near the top we should see the same kind of speculative fever that occurred in late 1999 with the same extreme earnings based valuation problems.

Using Seasonal bias to help Predict the Likely Short-Term SPX Movement

Generally with the SPX in the middle of a well defined channel, the likely direction over the next ten days would be a toss-up. However, in the current case, we have some extraordinary seasonal clues that make the picture much clearer.

April End of Month (AEOM)

Using ULTRA's SEAS2 system it's very easy to identify one of the most bullish 5-day seasonal periods historically. Owning the SPX during the last two days in April and selling at the close of the 3rd trade day of May has historically produced:

Since 1942
Winning Trades: 65%
Annualized Return while Invested: 47% (About six times the normal appreciation rate of the SPX)

Since 1995 (Real-time record based on release of this phenomenon in ULTRA 4)
Winning Trades: 55%
Annualized Return while Invested: 58% (Six times the normal appreciation rate of the SPX)

This historical bias obviously implies another SPX attempt at R1 in the next five days.

Post Cinco de Mayo (May 5th)

Using Ultra's Test/Periods functionality we can easily test what historically happens after the AEOM period.

Testing what historically occurred since 1942, had one purchased the SPX on May 5th (or the next trading day if that day fell on a weekend) they'd have experienced the following results. (Test/Periods give much more information that has been omitted for simplicity)..

As you can see an investment in the SPX at the close on May 5th and holding four days historically appreciates at a minus 18.8% annual rate since 1942.

This historical bias obviously implies that the SPX will not be able to break out above R1 in the near future.

In Summary

Based on historically reliable seasonal bias, we should see the SPX rally until around May 4-5 attempting to reach R1 at around 1330. Then a correction for a few days during the May 5-11 period. This correction could be the start of a drop to S1 or even the precursor of a breakdown of S1.

All types of analysis are only 75% accurate at best. But if one is holding a long position looking to take profits, or looking to protect profits with put options, this bias should not be ignored.

One may may want to attempt a big score playing these moves with puts/call options.

Again using Ultra's Historical Analysis of the SEAS2 system indicates that from 1983 to present during the time AEOM is invested, the NDX appreciates at a 163% annual rate. Capturing these types of gains in a 5-day period during which a call option has not had a chance to significantly decay, can result in some enormous profits with limited risk.

SMAY Strategy Nearing a Sell

The easiest and simplest investment strategy of which we are aware is SMAY. For many years, this is what we have recommended that buy-and-holders use for their tax-free accounts if they refuse to do anything more advanced.

Simply buy at the close in October that allows you to be invested for the last two days of October and sell at the close on third trading day of May.

Historically since 1942 trading the SPX:
Winning Trades: 77%
Maximum Drawdown: -26% in 1974 (Compared to -49% for the SPX)
Annual Return: 10.2% (Compared to 8.1% for the SPX)
Annual Return trading Rydex Nova (SPX times 1.5 beta): 13.7%
Ulcer Index: 5.9 (Compared to 13.9 for the SPX)

This simple strategy outperforms the SPX with 1/2 the risk as determined by Maximum Drawdown and Ulcer Index.

This strategy will allow the least sophisticated of investors to have some strategy they can depend upon to hopefully allow them to be confident in long-term success and not make the common mistake of panic selling at the worst possible time.

Imagine the investor that started his 401k investment program buying an SPX index fund on 01/02/00. With SMAY, he'd be now be ahead by 24% while the buy/hold SPX is down 11%.

Unfortunately, it's likely he'd have bailed out when the SPX was near its -49% drawdown. But with SMAY, he'd have only experienced a -23% drawdown. And most importantly he'd have been able to rely on a strategy which makes it much less likely that he'd have panicked out of the market at exactly the worst time possible.

NASDAQ 100 Technical Price Analysis

NDX Nearing Important Support S1

The NDX has formed an important support line S1. There is also a horizontal channel S2/R3 in effect, in which the NDX is about halfway. Considering that S1 should not fail during the bullish AEOM period, we expect a move back up to R2 into early May.

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

NDX-RS rose above R3 indicating that its downturn in relative strength is probably over. We'd like to see a new uptrend line develop before we can regain confidence in the NDX.

(The chart above can be produced with ULTRA via the "Graphs" menu item with NDX in the "Database Item or EDF Name:" field and SPX in the "Divided by:" field).

Can the XAU keep Going Higher?

We first predicted the XAU would rise to 150 in Oct 2004 based on a Head-and-shoulders Bottom. We've caught much of the move including a set of short-term trades that timed tops and bottoms almost perfectly.

Now we have a huge gap in the XAU that has not filled. To fill that gap, S2 would have to fail implying a drop down to S1 at 135. This is the scenario we expect to unfold in the near future at which point we'll buy the XAU.

If S1 fails, we'd then expect a drop to about 110 which is the top of the horizontal channel whose breakout launched the move to 160.

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