Market Should Keep Going Up Until …

by Sam Collins | August 4, 2011 4:00 am

 After seven straight days of losses, the S&P 500 finally reversed on the highest volume seen in over a month. The NYSE traded 1.35 billion shares with advancers leading decliners by a slim margin on the NYSE, but by a larger margin on the Nasdaq (1.5 to 1). The rally followed a better-than-expected ADP employment change for July, along with a factory orders number that fell less than expected.

S&P 500 Reversal

Trade of the Day Chart Key

The bulls will welcome the turnaround, but if it is the result of a knee-jerk reaction of short sellers covering following the stronger ADP number, the reversal may have limited value. The mid-week ADP numbers have had little predictive value to the final jobs numbers on Friday. In fact three of the last four ADP reports showed job strength when in fact payrolls decreased and the unemployment rate actually increased when Friday’s Labor Department numbers were announced.

In order to completely reverse Tuesday’s breakdown, the S&P 500 will have to close above its 200-day moving average, now at 1,287 — a very tall order.

VIX Chart

The demolition of the 200-day moving average with down volume of 16-to-1 on the NYSE and 15-to-1 on Nasdaq is a serious development. And the failure of the CBOE Volatility Index (VIX) to exceed last week’s high of 25.94 means that “fear” has not yet reached a final peak, and so the chances are high that we have not yet seen the ultimate low of the current breakdown. The VIX is just too complacent, and that is bearish.

However, after seven days down and all of our internal indicators oversold, a modest rebound could continue for several days — perhaps until Friday’s jobs numbers. Thus, buyers of precious metals could see a mild correction and should hold off on purchases while holders of stocks with broken charts may get an opportunity to sell at better prices.

S&P 500 Support Zones

Trade of the Day Chart Key

For those with a technical bent, yesterday’s discussion in the Daily Market Outlook provided some interesting numbers. To have a fully confirmed head-and-shoulders breakdown, the S&P 500 must close under 1,223. The minimum target of a break is 1,143 with ultimate support at last summer’s trading range, which approximates 1,040 to 1,130. 

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