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September 5, 2012 / redman59

Reducing the Noise and Zooming Out

Watching the stream today it seems there is a growing number of skeptics and traders betting on the downside.  It is definitely easy to get caught up in the day-to-day news, trader sentiment, or statistics of past seasonality.  Keep in mind these are all subjective reasons for market direction.  One way I try to mitigate all the noise is to keep in mind the weekly chart of the indices and the fact that we are seeing individual long setups in stocks work with volume supporting the moves (ie. GS, MOS, LNKD, CAKE). 

Looking at the weekly charts of the indices it is hard to be bearish.  Most notable is the $RUT which was previously a laggard but has caught up and is now seeing consistent tests of resistance.  Also we have seen money rotate out of the $DJIA and allocate into riskier assets.  When looking at the weekly chart I chose the $SPX as it is probably the most widely followed.  Looking at the chart it is really hard for me to be bearish here, remembering that being bearish and looking for a pull back are two different opinions.

Note the following on the weekly SPX chart:

  • see more pressure from the downside for a move to the upside (subjective)
  • breakout (2nd) out of an ascending triangle (dotted gray line measures the resistance)
  • breakout 2nd time was met with increasing volume (bullish)
  • remain above rising 10 and 40-week moving averages
  • previous undercut of rising 40-week moving average (yellow box) saw immediate buying
  • rising volume on move up met with declining volume on recent move down
  • the recent weeks move down is not volatile but very orderly, as in where tops are usually met with volatility

In my opinion if we see a pull back from these levels I am looking at the 1365 area.  I like this area for reasons that it seems many factors from below come into play: the rising trendline, the 40-week moving average, and the support line (gray dotted line from ascending triangle top).  Also this will be a good test as we would undercut the 10-week moving average probably shaking some out. 

Also I remember in the past that when we saw these grinds higher there were complaints that the financials were not participating.  Looking at the $XLF (Financials Select Sector SPDR), this chart is looking bullish to me as we are seeing tighter consolidation after a breakout from a more volatile range.  I am concentrating on the 14.80-15.00 zone to hold and a break below that will change my perspective on the financials.  Daily chart below:

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