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Are we nearing the end of this rally?

Last week had all the characteristics of an options expiration week. Weakness begins week before, and early part of the week, and then a run up in prices so that options that were purchased for pennies on the dollar earlier in the week end up profitable. That would set next week up to be a negative week if the pattern continues, and it has high odds.

However, the bigger question remains is this rally ever going to end? Obviously, the answer is yes, but then it becomes a question of when. So let’s go to the charts and see what they have to say beginning with a weekly chart:

sc

If a picture is worth a thousand words, would a chart be worth a thousand dollars, maybe more. There is a gap slightly above that I can’t see being left unfilled before resuming business to the downside. How can I be sure we have downside business left? Well obviously nothing is for certain in the market, but if the recession did end, and that is a very big IF as I put a very low probability on that being the case. Stocks are currently overvalued and this would be an outlier on the charts just based on PE ratios after recessions. Furthermore, at best we would be looking at below average multi-year returns. Technically, there are a number of resistance areas above. As you can see on the chart above, I plotted a few and in trying to keep the chart clearer didn’t bother with the 50% fib retracement discussed in previous posts at around 1120. We have the 89 week moving average, close to the 80 wma covered in other posts, but I prefer the 89 week since it is a Fibonacci number. In either case, they are close enough: the 80 wma is at 1065 for the SPX whereas the 89 wma is at 1099, near the upper end of the gap, so pretty much all contained near the 1100 area.

Let’s look at some shorter term charts for some clarity of short term direction:

sc2

Now this also doesn’t mean that we have clear sailing in filling the gap to 1100 or so, as in the short term we may be due for a slight pullback even though it may not be the end of the rally, another bear trap possibly. Of course we may not get that short term pullback, increasing the odds that a gap fill would be the top. Clearly in both cases the ultimate risk is to the downside, with the exception and very low odds of a rally piercing through all these resistance levels and holding. In that case I will concede that this is a new bull, but only in that case.

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August 24, 2009 Posted by | Legacy Funds, Uncategorized | , , , | Leave a comment