SP-500 Market Condition: In Crisis Lies Opportunity

I preferred to wait until the official end of the quarter on Wednesday (6-30-2010) before updating my analysis. Yet, Tuesday’s market performance was so dramatic that I feel compelled to provide some preambulary comments to the quarterly report. With little time to spare this evening, let’s get at it…

1) Tuesday’s trading really flirted with disaster as the S&P 500 broke key support @ $1040 to reach a low of $1035.18, before regaining support at this level. Some market bulls may be encouraged by today’s close, but a deeper analysis reveals some disturbing signs.

To begin, the head and shoulders pattern is now in danger of breaking its neckline (support) and MACD has turned negative near a key support level. Unlike examples 1, 2, and 3 (see chart below) where MACD turned negative near key support levels, what distinguishes example 4 is the fact that the S&P 500 is trading in a downtrend instead of an uptrend.

A reversal of this trend, while not impossible, would be extraordinary given the fact that technical trends for short, intermediate, and long term time frames on the S&P 500 are all down. Besides this, the violation of its 21-day moving average several days ago decreases the odds for any significant sustainable reversal.

Daily Chart of S&P 500 as of 6-29-2010

2) It turns out that this re-confirmation of support only occurred during the final 30 minutes of trading with explosie buying of 66.1 million shares in the SPY exchange traded fund (see chart below).

This was plenty enough to goose the S&P 500 index and had it not been for this inglorious hockey stick save by those market manipulating bastards who need to keep the game afoot, then “the jig is up”.

Or to put it another way: “Trade is much more superior to piracy. In piracy, you can only rob and kill a man once. Aye, but in trade, you can cheat him again and again…”

30 Minute Chart of S&P 500 as of 6-29-2010

3) Jumping further ahead to a monthly chart of the S&P 500, I see a strong possibility for a bearish fibonacci retracement from the April-2010 highs of $1219.80 to the March-2009 lows of $666.79 if the support level of $1040 and/or the 21-month moving average fails to hold (see chart below).

Monthly Chart of S&P 500 as of 6-29-2010

4) Below is a table that analyzes the potential impact of a fibonacci retracement upon market valuations for the S&P 500.

The earnings estimates for 2010 are based upon Standard & Poor’s  estimates as of June-10-2010.  As economic conditions change, earnings estimates are usually revised upward or downward. Few would dispute that the global macroeconomic outlook has weakened over the 2nd quarter as Europe’s sovereign debt and banking woes along with British Petroleum’s environmental oil spill disaster in the Gulf coast region of the United States remain unresolved issues.

Playing devil’s advocate, I have discounted these 2010 earnings estimates by 15% to conservatively represent the anticipated analysts revisions which are highly probable after upcoming quarterly earnings and guidance announcements.

Hillbent.com — Market Analysis & Timing Strategies

So, this is the current market condition for the S&P 500 as we approach the end of the quarter. Despite the bearish primary trend, there will be some bullish rallies within this market. Nothing goes continuously up or down in a straight line, especially the stock market.

Investors could once again find themselves in portfolio-crisis management mode, but should remember that in every crisis there is opportunity. In my humble opinion, any opportunity to buy this market at 11 to 13 times earnings (based upon the 15% discounted 2010 estimates or any lower consensus estimate revisions for 2010 or 2011) is a bargain.

Ladies and gentlemen, this is not the time to panic. Prepare to defend yourselves, but attack the enemy (market bears) with ferocity on any signs of vulnerability (cheap market or stock valuations). And remember to stay Hillbent for the Market Direction…

Originally published at hillbent.com and reproduced here with the author’s permission.