A Turning Point In Early September For ETFs? (SPY)

All summer long we’ve been locked in a wide trading range that extends roughly from a low of 1020 on the S&P 500 to a high of 1120.  Now with the calendar turning to autumn, mid-term elections close at hand and having arrived at a significant technical juncture, it seems likely that new forces will serve to push the markets in a decisive manner in one direction or other. 

Looking at My Screens 

On a technical basis, the sharp three day rally last week pushed the S&P 500 back up to strong resistance levels around the 1100 mark with the widely watched 200 Day Moving Average just ahead at 1116. 

Less widely watched is the Point and Figure Chart of the S&P 500 that is displayed below. (The best way to play the S&P 500 with ETFs is through the SPDR S&P 500 ETF (NYSE:SPY))

 

Chart courtesy of stockcharts.com 

Starting at the top, the black arrow highlights the pattern is in a bearish configuration, expecting lower prices ahead with a price objective of 942.85 and so the point and figure chart is on a “sell” signal.

More significantly, it has also broken below the upward trending blue bullish support line and this indicates a very significant trend change from bullish to bearish.  

These changes in trend are very rare and very significant as the red and blue lines tend to act like walls in the path of the columns of Os and Xs. 

You can see the last such change highlighted by the arrow at the lower left of the chart which occurred shortly after the beginning of the huge rally last March, and this uptrend has been in place until just this month when the uptrend was broken by the column of Os descending to 1040. 

Now we’ve seen a retracement rally that has brought the last column of Xs back up to 1104 and the base of the new red bearish resistance line.  This line also corresponds almost exactly to the 200 day moving average. 

So now the situation is quite clear.  A break above the red bullish resistance line would represent a significant trend change back to the positive while failure here would indicate significant potential for lower prices ahead, particularly if/when the 1040 support level is breached. 

I’m not a fortune teller and my crystal ball is fresh out of batteries so I don’t know which scenario will unfold but I’m quite confident that “Mr. Market” will soon be telling us which side of this line on which to place our bets. 

Probability would point to lower prices ahead and Wall Street Sector Selector remains in the “Red Flag” mode.

The View from 35,000 Feet 

It was a good news/bad news kind of week: 

The good news was that China’s PMI came in better than expected, home prices were up, personal spending and income were up, although very weakly, the August Purchasing Manger’s Index was better than expected and the unemployment report was “not as bad as expected.” 

The bad news was that car sales took double digit declines to the lowest rate in 10 years, construction spending was down, factory orders are slowing dramatically, and most significantly, on Friday the August Institute of Supply Management report was down to 51.5, with above 50 representing growth, but this was significantly below expectations and the second lowest of the year.  Also, while the non farm payrolls was “less bad,” the U6, the measure of total unemployment/underemployment rose to a four month high while the household survey reported a significant drop in full time jobs which would indicate that most of the new hiring in the headline report was for part timers.

What It All Means

The economy continues to slow, we’re at a serious technical turning point and September is the start of the “second new year” as vacations end and traders return to their desks.  Furthermore, the Administration is beating the drums for more help for the economy as the mid-term election looms larger and everyone knows people will be voting, as always, with their pocket books.

The Week Ahead 

Economic Reports: 

President Obama’s statements mid-week on his plans for further help for the economy and the Consumer Credit Report will be the events of most significance. 

Wednesday: 

1400: Fed Sept. Beige Book

1500: July Consumer Credit 

Thursday: 

0830: Initial Unemployment Claims, Continuing Unemployment Claims 

Friday: 

1000: July Wholesale Inventories 

Sector Spotlight: 

Leaders:  Internet, Solar, Insurance 

Laggards: T Bonds, Japanese Yen. 

Written By John Nyaradi Publisher of Wall Street Sector Selector 

Disclosure: sef, psq, rwm, efz, vxx, sh, skf, spy put option

John Nyaradi is Publisher of Wall Street Sector Selector and Senior Vice President of Private Client Services for ProfitScore Capital Management, Inc. Get a free Special Report from Wall Street Sector Selector

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