Market preview – trading plan for May 26, 2015

Weekly outlook – S&P 500 cash index (SPX)

The S&P 500 cash index ($SPX) closed at 2126.06 last Friday, up 3.33 points for a tiny net weekly gain of 0.1%

Last week the SP500 reached a new all-time high and managed to close the week above the April high. The momentum was slow, but still enough to help to hold up the price. However the volume was low, as it has been for three weeks.

This is a short week due to the Memorial Day holiday on Monday. It is also the last week of May. The time is moving into the classical bullish period at the end and beginning of the month. Based on historical patterns, this week and next week could be the time for the market to make a high for the first half of the year.

Technical analysis

a) Long-term

150522-SPX-weeky

SPX Weekly Chart

The S&P 500 index made new highs last week and closed above the April high for the first time on Friday. This is a clear indication the immediate rally is intact and the long-term outlook remains bullish. Both the SP500 and NASDAQ made new record highs last week, which is encouraging investors to stay on the uptrend. And there is little doubt that uptrend will continue.

We don’t expect to see it go straight up. In the immediate short-term some profit-taking from early entrants could prevent the price from advancing or slow it down. We should not expect advances of 50 or 100 points a day, as the Chinese markets are seeing. The SPX needs to retrace first, as if often does after it makes new highs, and then continue to rally, inch by inch.

But there are several signs the market may be near a short-term top.

1. VIX – market volatility index. Last Friday, it hit on the lowest level since Dec 2014, a sign of extreme confidence among investors. They are not taking insurance against future sell-offs. The VIX closing price at 12.13 indicates strong bullishness. Few investors see serious declines ahead; and typically, when everybody believes the same thing, everybody is wrong.

The VIX price could decline near 10 level, which we think would be a danger signal. As VIX declines, sentiment moves closer and closer to the market level, until there are basically no bears left, everyone is fully invested. When that happens, where will the buyers come from?

2. Sentiment indicators are extremely bullish. Market Sentiment indicators continue to be strongly bullish, a fact that makes prudent investors cautious. They are usually contrary indicators:

⇒ AIIA (American Association of Individual Investors) survey last week showed 25.21% bullish vs 25% bearilsh. 49.79% neutral. This survey indicates that most are staying outside the market.

⇒ Investor’s intelligence Bulls vs Bears as of May 22, show 50.6% bullish vs 15.8% bearish. A large majority of investors are still bullish.

⇒ NAAIM – the association of active investment managers – is reporting that on average respondents are about 70% exposed to US equities, a slight decline from previous surveys. That means there is about 30% of assets still on the sidelines. And active managers are still on the buying side.

b) Short-term

150522-SPX-daily

SPX Daily chart

Last week SPX had a consolidation week. It tried to smooth out the overbought condition caused by the previous week’s rally. He price movement was slow, the range was narrow and the volume was dry. But upside momentum continued to hold price above 2125 level for closing for the past 5 days, which gives the impression the bulls were still in control.

The 2125 level is significant because that is the neckline of the “Wedge” pattern on the daily chart. As long as SPX continues to hold above that neckline the odds still will favor the upside.
The next obstacle for the rally will b the 2135-50 zone, There are lots of Call options outstanding at that level, and that could create a ceiling for this week. A failure to break it could lead to the price dropping back down again.

Our model shows the closing price for the month should be above 2105, and possibly at the high end of the monthly range.

Daily outlook – S&P500 mini futures (ES)

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