Tuesday, July 2, 2013

Testing the 50 Day Moving Average

prices reversing off the 50 day moving average
Click on Chart to Enlarge

Three out of the last four sessions have seen the S&P 500 move up to the 50 day moving average and then pullback to close near the middle of the range.  I believe this is typical evidence of program trading kicking in around the 50 day moving average.

In my experience I believe 1 of 2 scenarios is likely to result.

1) The rally attempt fails here near the 50 day average.  Thus far we have been seeing a basically declining volume rally off the June lows, and there is evidence that there is some initial selling as price pushes into this average.

2) Very soon we see a gap up and a big up day probably with a pick up in the volume.  If the rally is to continue, then once the weak program trading selling pressure is exhausted after several tests of the average, price will often blast through the average and often occurs with a gap.

In these situations I would either switch to a shorter time frame to take trading signals, or await a breakout to the upside of the 6/18/13 high in order to go long.

If prices do manage to make new all time highs, then I think it is possible that the market experiences a further sustained rally.  Markets at new all time highs can often moved in sustained trends as there is no overhead resistance attracting sellers.  The NYSE short interest ratio is at about 4.0 and has risen as prices have risen the last couple years.  From comparison to the 2000 and 2007 bull market highs, that is NOT the pattern we would expect at a bull market high.  The last major highs have been preceded by periods of falling short interest.  In any case, the prior highs topped with a ratio around 4.0, but after coming off of higher levels.  As stocks make new highs, significant short interest can create some forced buying to help sustain the rally.

On a short term basis I personally am looking for an hourly time frame sell signal to develop on this test of the 50 day MA in order to possibly establish short positions for a move to new corrective lows.