SPY (S&P500 ETF)

Weekly

Immediate support lies around 115-117. The Head and Shoulders pattern achieved its target within this support level.
In the next 7 weeks, watch 107.55 on the SPY. Closing below this level would confirm the bear cycle.
The weekly MACD has been patiently forming a bearish divergence (white arrow in MACD panel), and it is only now that this divergence is starting to equilibrate.
When the SPY breaks the immediate support, which is also the weekly 200MA, and a long term extended trendline, it is likely to break the TDST support (red dotted level @ 109. By this time, the MACD would be in bearish territory and a cyclical bear would be firmly established.






SPY
Daily

The daily chart shows a very clear Head & Shoulders pattern (outlined by the white arcs). A break of the neckline at 126 occurred on 2 August 2011, and it was quickly tested the following day. This test failed, and together with the MACD running into bear territory, resulted in a breakdown.
The H&S target was 117, which was subsequently hit on an intraday basis 3 days after the neckline was broken.
Clearly, the SPY is well below the 200DMA (dark blue line), which is a long established support for chart technicians, and plasters a bearish outlook. The last time this happened was in 2008 and it resulted in a hefty breakdown of the equity markets before a recovery was in place. Today, it appears that the depth of the tank is nearing a possible end, and it is likely that a test of the 200DMA would be along shortly. Again, this test is expected to fail.
Notice at the bottom, a customized indicator called the TTR. Note that when the TTR spikes above 0.86, after being less than 0.85, it represents a significant turning point.
The SPY has clearly topped out and the bull turned over. What entails shortly could be a dead cat bounce and more downside risk for the rest of 2011.


VXX (VIX ETF)

The daily chart of the VIX ETF, VXX, has a very clear bullish divergence. In May 2011, this bullish divergence did not equilibrate and instead continued its build-up. The recent breakout of volatility as indicated by the VXX suggests that volatility is likely to be increasing in the weeks to come.
This sudden increase of volatility has met with one of two resistance. The first resistance is the 200DMA of the VXX. It is not clear at this point if the test has failed or there is more of a volatility spike.
The other resistance is the TDST resistance which lies on 34 of the VXX. The current Setup is short of breaking that level.
Given the circumstances, a breakout of the VXX would mean a consequent volatility increase, which is bearish for equity markets. This bullish divergence has yet to run its course and this supports more volatility in the coming weeks.
However, it is possible for a decrease in volatility and the VXX to find its way back to 25 before another spike in the VXX.


TLT (20Yr Treasury Bond Fund)

The daily TLT chart went parabolic with heavy volume this past week. This is happening as money is moving into US Treasuries and out of the equity markets as a very fast pace.
Clearly, the extreme short term movement is past mania and a reversal looks to be due soon. This reversal may be seen as soon as Monday 8 August 2011, as the USA was downgraded by S&P to AA- from AAA. While the weekend saw media and experts argue both camps, the TLT chart suggests a return to mean. A close below 101.54 would signal a possible drop to less than 98.
At this point, the demand in Treasuries may mean that a recession is expected and therefore funds are flowing into “safe haven” US Treasuries. An outflow of money from Treasuries would spur the equity markets into a rally.
Having said that, the US Treasury is likely to remain in demand given the developments in Europe, and possible surprises from China.


From the charts above, which are not the usual charts I use for analysis, there appears to be a short term reversal which is likely to be a relief rally, or a technical rebound, before a larger second leg movement follows. Given the current scenario and status, if there are no major changes (eg. QE3), the equity markets would be in bearish territory and continue to be hot with negative news from Europe, and perhaps even China, in the coming weeks to the end of the year.
Just a brief, yet significant mention that the usual charts all signal weakness in the coming weeks. Something I have not seen for a long time.
Fair warning had been given in the charts, and if anyone out there is still applying a dollar-cost-averaging or buy-and-hold strategy, it might be high time to for a review.
For now, let’s see what happens over the next few weeks…


The MadScientist 7 August 2011



Note: Any material posted here is of my sole opinion, and my opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational purposes only.