Last week I charted the Dow Jones and said the break of the trend line was a bearish indicator. The only hope would be that the $DJI didn’t stay below that line the following two days. Instead, the $DJI edged lower and we ended up with a horrible Thursday well below that line. I’ve made my point on the Dow’s direction, so today I turn to the S&P 500 ($SPX.X) to chart.
Starting with the good stuff, the January 23rd low was 1,270.05, the March 10th low was 1,272.66 and the low on Friday, June 27th was 1,272.00. That’s a pretty solid floor, not counting the March 17th low of 1,256.98.
The uglier side of the story is with the trend lines and moving averages, the VIX and history. For the past month and a half the lows have only gotten lower each time it bounces back down. The 10, 20, 50, 100 AND 200 day moving averages are all above the S&P 500’s current price. The VIX (aka fear indicator) crept up to 24 before pulling back some on Friday afternoon. That doesn’t come anywhere close to where it was the last couple of times SPX hit 1270/1272. Without higher fear, some investors and traders are still holding on thinking the bottom is here already. A good capitulation is needed to give us a short term bottom.
History hurts the bulls’ case too. With the average bear market knocking the S&P 500 down almost 30% you have to wonder if this time will be more, less or the same as the average previous bears. We’re down 18% from the highs last fall and with oil so high and credit so tight, I believe we have more downside coming our way. Best case, we hit the average and only fall another 10% from current levels, but I suggest being even more cautious and preparing for a deeper dive. Wealth preservation is as important as wealth accumulation at times like this.
I’ll continue to sell naked puts when I see good opportunities, but will keep them far out of the money (ie, far below the stock’s current price) most of the time with the expectation that while the markets work through this bear market we’ll see some bull rallies mixed in. I’ll sell calls on the bull rallies as long as I don’t see a major turn in oil or credit. When I see the VIX spike closer to 35, I want to have cash available to go closer to the money on my naked puts and try to profit from higher volatility and the likely short-term rally.
One last mention on the chart below, I should have pointed out the break in Williams %R lower from overbought on May 20th. That was a big bearish indicator that hasn’t reversed itself yet. I’ll be more alert to point out the break north of oversold when I see it next.
another good chart, thanks, we’ll see where things go from here.