Diary of a Financier

Chart Update: SPX (ES) Rolling Over, Bearish Indicators Trump Bull Pennant

In Capital Markets on Fri 4 May 2012 at 17:54

The S&P 500 (SPX) just closed at its daily & weekly low. SPX is rolling over like a dog, much in accordance with my technical and fundamental expectations.

I expect a bounce up off this closing price next week, followed closely by a descent through support. But, I see an interesting contradiction in the market’s technicals, and bull/bear conviction will clearly materialize by the close of trading next week. Here’s a synopsis of my outlook at this critical juncture.

In a trending market, I always defer to the classical chart patterns over other technical tools. Most indicators lose their deterministic powers in a trending environment wherein prices quickly migrate toward fundamental value as if drawn my some magnetic field. Classical patterns help me distinguish such markets using analogues from the past. However, in a consolidating market, indecision captivates a price-action in want of fundmental clarity, and investor psychology is left to its own devices. Technical indicators trump all comers in these instances.

The latter would characterize today’s market, which has been consolidating since March 1. The trump of technical indicators over classical patterns settles a score between the two, as we close this ugly trading week at lows. A daily chart of the S&P 500 futures (ES/) exhibits this dichotomy, with a classic bull pennant at odds with indicators’ bear divergence:

ES daily- bull pennant at odds with indicators’ bear divergence, should rally up to trendline resistance next week.

While oversold intraday fractals have me expecting a bounce off of that pennant’s support trendline (and a rally to the resistance trendline), I’m ultimately bearish on the remainder of this month. The bull pennant looks too immature to breakout higher at this point anyway, so our risk exposure is accordingly light, having sold into the strength of last week’s rally. I suppose that where my money and my mouth are.. Compounding all this, long-term fractals exhibit bear divergence of their own:

ES daily/weekly/monthly- while daily bull flag at odds with indicators’ bear divergence, divergence in longer fractals persuades me toward bearishness.

I note the indecision of the monthly chart above. While the stochastic suggests SPX is at the top of its trading range, momentum (MACD) & buyer’s interest (MFI) haven’t conceded the bull trend yet. If the short term reversal I expect next week continues ascending further into the month of May, that bull pennant will have asserted itself and reversed the bearishness of longer fractals. Either way, we should have a verdict come next weekend.

–Romeo

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