Market Direction Remains Under Pressure As 1350 Level Hangs On

Market Direction on Friday was interesting right from the start. The rest of the world’s markets had moved lower before the S&P 500 opened and futures showed the market would open lower. The S&P opened immediately lower and fell directly to support at 1350. The 1350 level marks support going all the way back to the years 2000 to 2003 and again in 2007. This is long-term support which is continually being challenged by sellers. The challenge of the 1350 level will only last so long before buyers will move away and the 1350 level will break. For the 1350 level to hold, the S&P 500 must convince buyers to move in and push the index higher. At this point that is a particularly difficult task.

Friday’s action is clear in the chart below. The opening market direction collapse was bought and buyers pushed the S&P up almost 15 points before noon and then the rally was lost, as after all it was a Friday and few traders want to hold positions over the weekend. The slide in market direction over the afternoon shows the lack of conviction on the part of investors.

Market Direction Chart For May 11 2012

Market Direction Chart for May 11 2012 shows the market fell to support at 1350 and then held.

Market Direction And Long-Term 1350 Support

The chart below over the past 12 years shows the long-term support in the S&P 500 at the 1350 level. The problem at this level is that 1350 marks a highwater level in stocks. While many investors may feel that today 1350 marks fairly valued stock levels I believe that anywhere above 1350 many stocks are over-valued.

Therefore in an environment where the Euro looks like it could disappear in a few years if Greece, Spain and / or Italy leave the Euro, it is hard for investors to get excited about stocks at what has to be considered full recovery for the S&P 500. 1350 then marks a lot of support as well as resistance. The best one can presently say is that the 1350 has held up well to the continual drops in the S&P 500.

Market Direction and 1350 Support Level in the S&P 500

The long-term support and resistance of the 1350 Level is easily seen in this chart

Market Direction and Market Timing Indicators

Below are the market timing indicators at the close on Friday May 11 2012. All except the Ultimate Oscillator indicate that the marketdirection is going to move lower. Momentum is falling, the MACD Histogram is falling, Rate of Change is falling and the slow stochastic and fast stochastic are both indicating that momentum could be building to the downside. Only the ultimate oscillator remains clinging just below 50 as it reflects today’s rally attempt.

Market Timing Indicators For May 11 2012

Market Timing Indicators For May 11 2012 continue to show that the market direction is lower.

Market Direction and Market Timing Summary for May 11 2012

Investors in general are holding onto the belief that earnings among US businesses are strong enough to support a move higher in the S&P 500. At the same time the S&P 500 had not broken to the 200 day moving average which means that the weakness since the end of March is a correction in an ongoing bull market. However in order for stocks to move a lot higher, there must be a long-term catalyst. The problems in Europe are not going to evaporate overnight, US Businesses will have to continue to grow earnings at a rapid pace to support a higher Price To Earnings ratio on stocks and unemployment must fall in the US and GDP pick up. For both of those to happen needs the housing market to recover.

About the only thing that investors can say at this stage is that the market has held up very well and often bull markets like to “climb a wall of worry”. However my experience has been that while bull markets do climb, often they are climbing so that they have further to fall from. Caution remains the keyword in my portfolio. I have built up cash and will continue to protect my portfolio with the spy put hedge. Market direction must turn back up convincingly, or else any rally at this point has to be suspect.

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