Looking for a medium term buy setup

It's been about a month since last post in which a short term setup for a bottom was expected. Turned out there was four short term setups...a rally, a correction, a rally, and finally the current correction. At that time I questioned and doubted a medium term buy setup due to the January Effect. Unless the SP500 rallies back above 1074 (January monthly close) tomorrow June 30th then the January Effect will be full-filled.

The current correction have probed below the SP500 1040 support levels. No doubt I believe the SP500 will go down more before an important medium term and possibly a long term bottom will be established. This is a large bottom range but I'm looking for buy entries around the SP500 1000-1040 level and this is where I'm looking for a medium term bottom to occur. From these price level I'm expecting the SP500 (and stock market) for the rest of 2010 to attempt to rally back up, at minimum, toward the recent highs set in April.

Revisited: The Jaunary Effect

It's the last week of May and the SP500 closed at 1087.69 last Friday. As we discussed back at the end of January when it closed at 1073.87...the January Effect implies a high probability of another monthly close lower within a half a year.

Here's the rule for the January Effect...

The old Wall Street saying "As January goes so goes the year."

At the last 30 years when the SP500 closed up for the month of January then 90% of the time it remain positive for the remainder of the year.

2007, 2006, 2004, 1999, 1998, 1997, 1996, 1995, 1993, 1991, 1989, 1988, 1987, 1986, 1985, 1983, 1980, 1979, 1976, 1975, 1972, 1971, 1967, 1966, 1965, 1964, 1963, 1961.

Only three cases where this effect failed and closed down for the year.
2001, 1994, 1966

When SP500 closed down for the month of January it doesn't necessary mean the rest of the year will be down. But since 1930 it usually does predict medium term weakness for the coming months.

In majority of cases, the SP500 closed lower within 1 to 3 months.
2009, 2008, 2005, 2003, 2002, 2000, 1992, 1984, 1984, 1982, 1978, 1977, 1974, 1973, 1970, 1969, 1968, 1962, 1960, 1957, 1953, 1948, 1941, 1939, 1935, 1932.

In rare cases it took a little longer before the SP500 made another monthly low.
1990, 1981 in 7 months. 1956 in 13 months. 1940 in 4 months.

So far the stock market has gone almost four months without making a new monthly low. Could the month of May be it this time? Last Thursday I anticipated a short term rally higher soon. Will the rally be long and high enough to extend the streak to 5 months without making a monthly close lower than January's closed? That I unsure of yet.

Buy Alert: Is this a short or medium term turn?

Talks of a crash flying around as the stock market is at very oversold levels that "should" warrant at least a short term bounce soon. There are hints that a medium term bottom is likely too but we'll see what the stock market gives us for now.

Potential short term pattern developing

As the stock market rallied higher last week and retreated this week, traders are looking for a possible retest or probe lower of the 'crash' lows of May 6th. Another price pattern that could be developing is a 'symmetric triangle pattern.'

Link below for illustration...
http://en.wikipedia.org/wiki/Triangle_(technical_analysis)

What this means is that the stock market (Nasdaq and SP500) could trade around in a coil pattern for another week or so and then make a final 'fake' breakdown below the crash lows before reaching a medium term bottom.

Short term bounce and then retest lower

About two months worth of rising stock market prices ripe away in less than two weeks. That's what being too extremely overbought for quite a long time can do. For the short term we could seen a rally back up toward SP500 1150 and then back down to retest (and likely probe lower) the low of yesterday 1065. An alternative scenario would be retest of the lows first before moving higher.

Unless this is a renewal of a long term bear market...which is in doubt... most indication is to look for a medium term bottom first within 2 to 3 weeks.

Short Term Alert: Sell signal if more downside

For the short term, with Friday sell-off and today's current weakness should very likely give a sell signal. With the very strong rally coming off from February to early April, which based on breadth-wise comparative to internal strengths witnessed in April and August of 2009...these types of rally usually hinted continued strength forward to 6 and 12 months later. That's been the case for the first 2 scenarios. So even though we could be in for a short term weakness (or worst case a medium term correction of over +5% to 10%) which could be similar to the January correction, but 6 to 12 months forward the market should likely be higher or near current price levels.

Amazing rally with caution

The stock market is having an amazing run-up this month with rarely ANY BRIEF pause. The breadth readings (advancing stocks vs. declining stocks) during the streak are similar to past bull markets of the underlying "internal" strength and could apply here again (as was the case in spring and summer of 2009) of continuation in higher stock prices 6 and 12 months from today.



But there is hints of negative divergence even though the major indexes are making new highs such as the Nasdaq, SP500, Russell 2000 (RUT). The above chart shows the Nasdaq rallying above the January 2010 highs. Thus far there are several other indexes such as the semiconductors, China Xinhua, hardware, internet, and Russell 1000 technology that are still below or at their Jaunuary 2010 highs. Unless they rally above their recent highs soon then this negative divergence could hint at least short term weakness if not medium term weakness.







So is this hint of negative divergence significant? This is the most significant divergence since a year ago when all the major indexes were making a new low in March 2009 (lower than their November 2008 lows) while the semiconductor, China Xinhua, hardware, internet and Russell 1000 technology indexes did not but instead made higher lows. Compare the charts above for the lows of November 2008 and March 2009. This was a significant positive divergence which resulted in the bear market low made in March 2009 and start of this current new bull market.