Wait for Confirmation Before Placing Any Bets

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Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.

Last week, the stock market ended on a weak note as the early week rally completely fell apart due to jitters of an imminent Greek default and chatter fromGermanyabout a bailout plan for their banks. That plus the uncertainty of potential terrorist activities around the 10th anniversary of the 9/11 attacks kept investors from making any long-side bets on Friday. 

The weekly chart of the S&P 500 shows negative and bearish candles with long tails from the previous two weeks. While better resistance for the oversold bounce remains up near the 1,240 level, it is becoming more likely that we will soon break out of the bear flag (white lines) to the downside soon without first testing higher levels.

SPX Weekly Chart

The daily chart shows this in more detail. The closest support area is around 1,140, which has successfully held as support on Aug. 26 and Sept. 6. Last week, the S&P 500 closed above that level and right at the bottom of the bear flag range. Quite simply, a meaningful daily close below 1,140 would get me adding to short positions. However, given that this would mean initiating short positions at the bottom of a trading range, I would have to ensure that stops are wide enough to allow for the inevitable volatility such an important technical failure would cause.     

SPX Daily Chart

In my opinion, the most important charts at the moment remain those of the dollar index and the EUR/USD cross rate. The EUR/USD broke its uptrend dating back to the summer of 2010 on the weekly chart. That’s a significant break, and while a retest of the break level cannot be ruled out, further weakness down the road is also being confirmed by the stochastics, which have a good deal lower to fall before getting into oversold territory.

EUR/USD Chart

The dollar index daily chart broke above the key 76 level on a closing basis last week, and is now having to contend with the downtrend dating back to August 2010. If you recall, that is also when the QE2 equity rally began. As long as the inverse correlation remains, higher levels in the dollar will mean lower stock prices.

Dollar Chart

We are at a critical juncture and while many things play a factor here, the price action in major U.S. and European equity indices, along with the dollar, are my main focal point. Both an imminent drop out of the aforementioned bear flag in the S&P 500 as well as a further relief rally to the 1,240 area are distinct possibilities at the moment. Confirmation of either is crucial before making any bets.


Article printed from InvestorPlace Media, https://investorplace.com/2011/09/daily-stock-market-news-wait-for-confirmation-before-placing-any-bets/.

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