THE S&P 500 FROM THREE TIME DIMENSIONS -- SHORT-TERM TREND IS NEUTRAL WHILE LONG-TERM SIGNALS ARE MIXED
DAILY CHART SHOWS NEUTRAL TREND ... In order to understand why the market is caught in a lot of cross-currents right now, it's necessary to look at it from different time perspectives. It's not enough to just consult the daily chart. It's necessary to also look at weekly and monthly charts along with their indicators. Right now, we're getting some conflicting readings. The daily bars in Chart 1 show that the short-term trend has gone from down to neutral. Prices are trading between support at the 200-day average and resistance at the 50-day line. That was why I suggested yesterday that short-term traders should cover some short positions to move back to a more neutral posture. That was partly influenced by the positive crossing in the daily MACD lines. There isn't enough evidence, however, to justify new long positions at this point. That view is supported by Chart 2.
Chart 1
WEEELY BARS ARE IMPROVING, BUT STILL NEGATIVE... Technical work can sometimes seem like splitting hairs. But it's important to understand the nuances of Chart 2. The Bollinger bands plotted around the weekly bars show us two things. One is that the S&P is bouncing from the lower band (and chart support along the 1140 level). The second is that it's still below the (dashed) 20-week moving average. It would have to close over that middle line to turn the intermediate trend higher. The MACD histogram (green bars) also tell us two things. One is that the intermediate trend is still negative. That's because the histogram bars are still below the zero line. [The histogram plots the difference between the two MACD lines. The crossing of the two lines occurs at the same time as the histogram crosses zero. The red and green arrows show the last three major buy and sell signals]. Notice, however, that the histogram starts to approach the zero line long before an actual signal is given. That's what's happening right now. The weekly histogram has been rising for the last two weeks (but is still negative). When used as a trading tool, that justifies some short-covering. But it doesn't justify new longs until the histogram crosses back over the zero line.
Chart 2
MONTHLY TREND IS STILL UP... Chart 3 applies the same two indicators to the monthly S&P bars. While the daily bars show the short-term trend and the weekly bars the intermediate-term trend, the monthly bars show the long-term trend. Ultimately, the signals on the monthly chart are the most important. The first thing noteworthy is that price bar is still trading over the 20-month moving average (middle dashed line). The S&P would have to close below that long-term support line to give a long-term sell signal. The price arrows show only two monthly crossings in the last five years -- a bearish crossing at the end of 2000 and a bullish crossing in the spring of 2003. That two-year uptrend is being challenged, but is still up. The same is true of the monthly MACD histogram. The last major buy signal took place in the spring of 2003 when the histogram crossed over the zero line. It's been weakening since the start of 2004, and is dangerously close to the zero line, but hasn't turned negative. That puts the long-term trend at a crucial juncture. At such times, it's better not to be too aggressive in either direction. While we use the long-term charts for trend direction, we use the daily chart for timing. Right now, the long-term charts are in conflict while the daily chart is neutral. It's probably best to give the market a little time here to resolve some of these mixed readings.
Chart 3
