Sunday, July 19, 2015

SGS Market Timer Is NEUTRAL ... A Top Is Very Likely In

SGS Market Timer Status:  NEUTRAL 
NEUTRAL as of close of 7/17/2015
RTS Current Portfolio (2015)
SGS Market Timer has turned back to "NEUTRAL" as of close of last Friday 7/17.  SGS is a trend following market timer.  It looks at smoothed (17 D-EMA) of slopes of 37 D-EMA (17 and 37 were chosen based on back testing) of 5 major indices, DJI, DJT, SPX, NAZ and RUT.  When an index has a positive smoothed EMA slope, it is in confirmed uptrend.  When an index has a negative smoothed EMA slope, it is in confirmed downtrend.  SGS is "LONG" when at least 4 out of 5 major indices are in confirmed uptrend.  SGS is "NEUTRAL" when only 3 out of 5 major indices are in confirmed uptrend or downtrend.  SGS is "SHORT" when at least 4 out of 5 major indices are in confirmed downtrend.

As of close of Friday 7/10, 4 out of 5 of major indices (DJI, DJT, SPX and NAZ) were in confirmed downtrend and hence SGS went from "NEUTRAL" to "SHORT".  As of close of last Friday (7/17) NAZ went from confirmed downtrend to confirmed uptrend which made SGS go from "SHORT" to "NEUTRAL".

I did not open any short positions last week simply because indices did not offer an entry point (i.e. a day with a lower low and a lower high).  Indices, especially NAZ and NDX, continued to go higher on the back of a couple of large cap issues (GOOG, NFLX, ....) reporting better than expected earnings and short covering due to agreements regarding Greece and Iran.

Where Are We Going Now?

SPX tested its AUL on 6/2/15 and then broke and closed below it on 6/4/15.  Since then, SPX has been trading under its AUL.  On 6/18, 6/22 and 6/23/15, SPX back tested its AUL and then sold off to find a bottom at 2044 on 7/7/15.  From 7/7 to last Friday 7/17, SPX rallied on the back of short covering because of agreements reached by conflicting parties both in case of Greece and Iran.

SPX finally ran into resistance at its PDL on Friday and stopped there.  Chances are good that SPX starts to sell off this coming week and goes down to test all important psychological 2100 level where also its 20, 50 and 100 D-SMA happen to coincide.  A daily close below 2100 would be problematic for SPX.  It would signal a sell off to test its short term uptrend line around 2090.

If SPX continues to sell off and gets into 2050 area, things would begin to get very interesting as shown on the weekly chart below.

2050 would represent the neckline for sizable H&S Top formation (shown in blue).  It's objective would be around 1965 (2050-(2135-2050)=1965) which is also below the neckline (1990) of yet another sizable H&S Top formation (shown in red).  The objective of the bigger H&S Top formation is around 1845.

What I described above is the more likely bearish case of where Market is headed over the course of next couple of months.  A big powerful rally this coming week in all major indices and a close by SPX above its all time high (2135), however, would negate that bearish case.  That's not likely, but no one knows for sure.

SPX: S&P 500 Index    D-SMA: Daily - Simple Moving Average
DJI: Dow Jones Industrial Index    D-EMA: Daily - Exponential Moving Average
DJT: Dow Jones Transportation Index    PDL: Primary Downtrend Line
NAZ: NASDAQ Composite Index    PUL: Primary Uptrend Line
RUT: Russell 2000 Index    ADL: Active Downtrend Line
OEX: S&P 100 Index    AUL: Active Uptrend Line
NDX: Nasdaq 100 Index    DTL: Dynamic Trend Line 

Disclaimer: The views expressed are provided for information purposes only and should not be construed in any way as investment advice or recommendation.  Furthermore, the opinions expressed may change without notice.