A broad based sell-off took place yesterday in all the major market indices erasing up to two weeks worth of gains. Is the uptrend over? To determine the health of the current uptrend I will examine the characteristics that define the bullish trend in the SPDR S&P 500 (SPY).
In addition, a potential distribution topping pattern in The Goldman Sachs Group, Inc. (GS) may be a few steps ahead of the markets. A trigger and follow through of the GS pattern, and names in similar stages, can provide a roadmap to the future direction of the overall markets.
In September 2010, an intermediate uptrend began in the SPY. The defining characteristic of the bullish trend, in my opinion, is an ascending trend line (log scale) that began from the lows of August 31, 2010 with a second touch point on November 30, 2010. The line continued to extend higher and tested for a third time on January 28, 2011, holding. Currently, the 20-day simple moving average is aligned with the intermediate trend line adding validity to this support area. Yesterday’s price action traded down to this level and held. If there is a confirmed break of this support level, provided by the trend line and moving average, the uptrend is over.
Be aware that there are three trends: up, down and most commonly forgotten sideways. If the current uptrend is broken, the markets are not necessarily in a downtrend. Before the commencement of a downtrend, above minor degree, distribution will present itself in the charts indicating a top.
Chart 1: illustrates the intermediate ascending trend line in SPY, currently aligned with the 20 day sma, that defines the current uptrend.
Yesterday’s sell off resulted in technical damage in many individual names. I am seeing many potential distribution topping patterns preparing for further downside. Recently, I highlighted topping patterns in Con-Way, Inc. (CNW), Freeport-McMoRan Copper & Gold Inc. (FCX) and Southern Copper Corp. (SCCO), all have triggered as shorts and began their descent. Many individual names, such as GS, are in distribution mode with bearish setups, while several other names are only beginning to form distribution patterns. Results of bearish pattern triggers will play a crucial role in determining the markets outlook.
Chart 2: Depicts a potential bearish head and shoulders pattern in GS, which will trigger with a confirmed break of the neckline (currently $163 area). Target: $148 is the minimum expected price objective. Protective Stops: aggressive: trigger on a close back above the neckline, conservative: activate on a close above $167. Trail Stops: confirmed move above a minor trend line, which can be drawn connecting the highs of the head to the highs of the right shoulder.
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Disclaimer: The information contained herein is not guaranteed. This is not a solicitation of any order to buy or sell. This material is based upon information that I consider to be reliable, but I do not guarantee its completeness or accuracy. Assumptions, opinions and recommendations contained herein are subject to change without notice, and I am not obligated to update the information contained herein. I have positions in SPY, GS, CNW, FCX and SCCO. This communication, including any attachments, is for the exclusive use of the intended recipient(s) and/or the intended recipient’s designees. Any use, retention or dissemination by a person other than the intended recipient is strictly prohibited. If you are not the intended recipient or designee, please notify the sender immediately by return e-mail and delete/destroy all copies of this communication.