Market preview – trading plan for Oct. 12, 2015

Weekly outlook – S&P500 cash index (SPX)

The S&P 500 cash index ($SPX) closed at 2014.89 last Friday, up 63.53 points for 3.25% net weekly gain.

Last week: The past two weeks have seen a remarkable recovery in the S&P500 large-cap index. The market has gained about 135 points from the September low – about half of that last week. The primary cause was Fed action – more accurately inaction – which the Street now believes will continue. With fears of a rate increase removed, the market felt free to jump.

This week: We have seen a sharp V-shape recovery in the SPX. The question is will it continue? We think a small pullback is possible, but not certain. There are two option expirations this week (on Thursday and Friday) and normally they would act to prevent the price from falling too far. But we also have three Fed officials speaking on Monday, and a raft of significant economic data being released during the week It could get wild out there.

Technical analysis

a) Long-term

SPX weekly chart

SPX weekly chart

The SP500 index made a sharp “V” recovery move in the short term, but for the long term, the outlook remains bullish. Despite the sharp decline in September, the price is still above the six-year uptrend line for the year 2009. As long as that support holds the price up, the long-term trend remains up.

For the intermediate term the picture is a little different. The index last week gained back half of the loss suffered in the big crash for the week of Aug. 17, and has regained almost 61% of the loss from the high in the first week of May to the low made Aug. 24..

It is close to the Fibonacci retracement. But it has been there before, on Sept. 17, and the market recoiled sharply from that resistance, moving down almost to the August low. Now it is making a second attempt, and has stopped at almost exactly the same place, around 2020. So we are waiting to see if the index can push past this level, or fall back again. The price action this week will give us a clue.

The 2040 level has been a significant resistance level and has held the price down in the past. Normally we would expect that resistance to hold until the end of the year. Now we’re not so sure.

The price action in the past two weeks has been very bullish. We may see a small pullback, but it is far too early to say that the bounce is done.

b) Short-term

151009-SPX-daily

SPX daily chart

The S&P500 index enjoyed a second strong rally week, largely fueled by hyper-dovish comments in the Fed minutes. The Fed has been trying to walk that back a little — there are three of them speaking on Monday, but not with one voice – and the start of earnings season has been disappointing.

Despite all that, the upside momentum continued strong last week and pushed the index back up near the September high for the weekly close. Now the SPX has only lost 2% for the year. The long-term Bulls are taking what comfort they can from that..

There are two potential patterns on the chart that could influence the price moves this week. One is the rectangle pattern, which is establishing a range of 2035 to 1860 for the second half of the year. (The range for the first half year, which has been broken , was 2135-1970). To maintain this pattern the index needs to stay under 2035 this week but remain above 1950 for the weekly close on any pull-back.

The second pattern is the butterfly pattern, which would allow the index to move up further toward the 2065-70 zone to test yearly pivot level and confirm that 1867.08 is this year’s low. To validate this pattern the index has to break through the 200-day moving average line in the 2033-43 area.

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The short-term indicators are getting overbought, but not extremely so. Market sentiment on the bullish side is picking up. As long as the Fed continues its yes-no ambivalence about the economic outlook and the prospects of a rate hike, there may be a small pullback, but overall the rally is likely to continue. We may also see some wild volatility.

Daily outlook – S&P 500 mini-futures (ES)

ESZ5 daily chart

ESZ5 daily chart

Last Friday was the 9th day the ES rallied from September low at 1861. An ultra-short-term buying signal encouraged short-term buyers to continue pushing price above the 50-day moving average line for closing.

Friday’s price action remained relatively strong. But total volume was less than the prior day. ES had a small sign of tiredness. Today is Columbus day; US banks are closed and Canada is celebrating Thanksgiving day. The volume will continue to be light. ES may have a smaller range move or repeat last Friday’s range.

2014.50-16.50 will be early session resistance zone and 1997-93.75 will be support. As long as ES doesn’t go outside the 2016.50 to 1992.75 range, buying at the low range level and selling at the high range level will be the p[referred strategy today.

Support and resistance

The major support levels: 1950-45.50, 1905-03, 1875-50.50,
the major resistance levels: 2015-18.50, 2029-28.50. 2035.50-37.50, 2050-46.75

Outlook

Short-term — Bullish
Medium term — Neutral
Long term — Bullish