Wednesday, October 24, 2012

October 24, 2012 - time to go long

Update: October 25, 1:35 pm - I did not buy the break below 1400 and I am sitting on the sidelines at least until tomorrow. The intraday reading on the cpc is at the overbought level while the market is falling - this usually is a setup for continuation to the downside.




The bull has paused a bit after the good news in September (economy expanding, the Fed easing further). The market usually does so as the news becomes undeniably good.

This being said though,  I think the market has reached the point from where it should start rising again. The set up looks pretty good: there are many who are calling for a longer drop from here, the market looks committed to the downside, the futures contract has reached strong monthly support, indicators are oversold and the economy still looks strong

Here is a daily chart for the SPX, showing commitment below 1425




  and a monthly chart of the December contract, showing important support at 1404 being reached



There is also a buy signal from the 13 day ema of TRIN, which has become oversold yesterday:


This market setup is coming in the context of a still strong economy, one that does not yet show signs of going into recession. Here is a chart of the pace of change in real retail sales, showing a still strong rhythm of growth.


The series has a bit more to grow before a slowdown in economic activity can be anticipated.


Now I have to admit that this bullish scenario is supported mostly by technicals (breadth, market behavior, support levels, sentiment etc.). The fundamentals that lie ahead are not very encouraging: the fiscal cliff and decreasing earnings.The market has chosen to ignore these until now. Will it do so in the future too? Who knows?

Anyway, the technical setup will lead to at least a bounce from here, so the risk is very low. A drop below 1400 on the December contract is a good point to buy. This may happen as the Fed makes its announcement today.