Thursday, May 07, 2015

moment of truth is near

For the past 5 months the US stock market averages have crept higher while spending most of the time trading sideways (blue rectangles).

The top chart of the S&P e-mini futures is particularly striking in this regard. It is a one box reversal, 10 point box point figure chart courtesy of Investor RT, a real time charting software I have used for many years. 

The extent of the sideways trading action within the larger blue rectangles is the largest such trading range which has developed near any potential top during the entire six year bull market. A drop below 1950 would be a downside breakout from this very extensive range and would certainly imply that move down to 1800 or lower has begun. An early warning of such a breakout would occur if the e-mini futures were to drop below 2025 (red line) the lower boundary of the smaller blue rectangle and the current position of the 200 day moving average.

Will the 2025 level be approached or broken? Right now I think the odds do favor a drop to that level and I will stick with this view unless the e-mini futures reestablish themselves above 2100. But I am not so sure that, having reached 2025, the e-minis will go any lower..

As I have observed previously the ongoing quantitative easing programs of the European Central Bank and of the Bank of Japan are increasing world liquidity and some of this is sure to spill into the US stock market. The Bank of China has recently eased its monetary policy as well although it has so far stopped short of initiating an asset purchase program.
The lower three charts show my favorite trend indicators for the US market. All three are below their 50 day moving averages (green lines) but above their 200 day moving averages (red lines). This configuration is typically a buying opportunity within a bull market. I am inclined to give the ongoing bull market trend the benefit of the doubt so for the moment I think that following a drop to 2025 or so the e-minis will move once again to new bull market highs.

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