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During the height of stock market volatility it can become very difficult to keep a clear mind and separate the hype from reality.  The hype comes in from the TV networks and the pundits who provide business fundamental news.  The problem with this type of information is that it is difficult to consume because it is not tangible enough.  There are wide ranging theories and expectations and fear tends to feed on itself and accelerate which causes feelings of panic and difficult decision making. 

The nice thing about stock price charts is that they provide something tangible to examine so we can at least develop some type of expectation of what might happen and modify our behavior accordingly no matter what is happening in the ‘news’.

I suspect there will be some type of big headline over the course of the next 6 trading days or maybe even over this weekend.  It may be a HUGE headline.  I do not have a clue in the world what it might be or even if it will arrive in such timely predicted fashion.

Looking at the QQQ Nasdaq 100 index ETF chart we can see that the QQQ is fast approaching the key 59 support zone.

I expect that when/if the QQQ reaches the 58 to 59 zone it will mark an interim bottom for the current mini crash in the stock market.  The green shaded area is the rough zone of support where we could see price trade ever so briefly before jumping back up to 59.

The 59 support zone in the QQQ is a supporting zone that had 4 previous peaks.  It is quite a solid support zone and I would be quite shocked to not see a bounce from this zone.

Because of the current stance of the RSI (relative strength index), it could be that a testing of the 59 zone will be an intra day type test where the market touches it and then ends the day with a strong reversal.

This is the type of chart that helps to keep you clear minded when the @#$%@#$ hits the fan.

Note that in the 2011 August time frame decline the QQQ fell right under support without even stopping, but it did rally back up and over the support zone eventually.

I can’t predict whether the 58 to 59 support zone would fail as a support zone.  However I will say that the overwhelming odds favor that this zone will hold as support and lead to a sustainable upside bounce and rally.

Right now the relative strength index reading on the QQQ is 24.79 which is already quite an oversold level for the market to be in.

I have been able to calculate that if the QQQ reaches the 58 level it would equate to an RSI reading of 16.07 which is extremely extremely oversold reading.  So this supports the thinking that the 58 to 59 zone will halt the current decline and allow the market to bounce.

So I will say that the 58 to 59 range on the QQQ should be watched closely as the capitulation point for the current decline.  This may occur by the end of next week or earlier.

Because of the extremely 16.07 RSI reading that the 58 level represents, it seems quite a good chance that the market would only briefly trade near that level and then form a strong intraday bounce.

The updated yearly sp500 candlestick chart is showing that the 2012 price candlestick is morphing into a reversal candlestick and may morph even further into bearish form as the year progresses.  The way the candlestick looks now (not even at the mid year point) suggests that there is a rejection of the new bull market zone above 1320.  The topping tail on the current 2012 candle indicates supply came into the market in that range.

Of course the year is no where near finished and a lot can happen between now and end of year, but at least up to today it is taking a bearish form.

I suspect that the 2012 candlestick will continue to take shape of a bearish candlestick.  If the 2012 candlestick is to remain as a bearish signaling candle very similar to the 2007 yearly price candlestick then it would suggest that the max downside for the 2012 candle will be in the 1210 range on the sp500.

So the scenario could play out with 1210 range being an important low and then an extended bounce into end of year period and then a new semi overbought stance in preparation for the real down move in 2012.

The yearly RSI structure shows that despite the long term bear market we are still technical in a positive bias era with RSI holding greater than 50.  It will be a breaking of RSI under the 50 range that will invoke the ultra bearish most destructive consequences of this bear market.  A yearly closing of RSI (relative strength index) under the 50 range will be the range where equities are truly hated.  This red shaded sell off zone could become reality in the 2015 to 2020 time frame.  That will likely be the time frame to load up on equities for ‘the long term’.

The slow grind down.

This is what is occurring in the market right now as represented by the sp500.

A few of my recent postings have been done during market hours and describe a bit of the confusion and frustration with the market to ‘get it done’.  When I say ‘get it done’ I am referring to the bears getting the job done right and getting the market to flush downward in true bearish fashion.

The bottom line as of today’s posting is that the market is slow to getting a real flush out.  The tape action is slow and frustrating ( to me at least).  In addition bearish tendencies are not showing true form in terms of volume (as represented by the SPY, DIA and IWM ETFS).  The downside volume has been weak and frustrating at best and is showing risk of a big upside bounce based on weak volume retests in SPY DIA and IWM.

Still, the fact remains when we review the weekly, monthly and quarterly charts of the indices, there is evidence that we are in the 1st inning of an extended down trend.  The longer term charts seem to have the upper hand with regard to bearish tendencies at this juncture.  Still, we have to be careful for taking anything for granted, even with the longer term charts.

Other important observations from today.

• The relative strength index is near the 30 oversold range.  A break under 30 would traditionally be the clue that the market wants to flush out.  But the 30 range is also an ideal spot for a strong upside reaction rally so one has to be careful in automatically presuming a bearish flush out will occur.  The weak volume seems to be warning a big upside bounce will occur.
• Two ETFS that are well worth observing carefully are the UUP ETF and the TLT ETF.  The UUP (US dollar index ETF) showed a dramatic up move on nice volume and continues to confirm that the UUP is on the verge of a major uptrend or at least upward stability instead of decline.  The TLT (20 year treasury bond fund ETF) also continues to show strength and appears to be on the verge of a massive cup and handle breakout that spans all the way back to 2008.  If this cup and handle is valid, then the bullish measurement of the pattern seems to suggest a surge in flight to safety is coming in a big way.
• Commodities continue to get clobbered and are leading the way down.

Pausing briefly with the technical talk, my general sense going forward is that Europe is about to go down the ‘rabbit hole’ and take the rest of the world with it.  This process is likely to take place over the next 1.5 years.  So again we are talking a ‘long term process’.  During this time it is likely in my opinion that there will be a longer term flight to the US dollar from Europe and elsewhere versus the Euro.  This will lead to the US Dollar Index getting a big upward surge which in turn should put pressure on USA equities for quite some time.

The monthly chart of the sp500 is starting to show a 2B sell signal as we are breaking under the 1360 support zone.  However the month of May is not completed yet.  It is looking like the easier downside tape if it is going to occur will occur in June 2012.  June or July 2012 would present a better opportunity for a confirmed MACD monthly histogram confirmed sell signal.

Above is the daily chart of sp500 showing once again that there is no clear sign of reversal.  There is no bullish MACD histogram setup and RSI continues to drift towards 30 level.  The low downside volumes could either mean complacency or that we are due for a sizable upside bounce.  However any bounce I would say needs to start occurring very very soon (ie. 5/16/2012) given how close we are to important support.

I have been near term bearish based on several factors evident in the market recently.  But it is clearly evident from yesterdays price action in the SPY ETF that the SPY is simply not pushing down with heavy enough volume and has also recently tested a previous important price swing on 19% less volume.  In the short term this is a cause for concern on the bearish side.  In fact it could suggest we bottomed today as long as we hold current support.

I mentioned in a previous post that DJIA 12700 was an ideal bounce zone and we are in that zone right now.

This fact coupled with the volume comparison in the SPY seems to support that bullish zone we are in now.

We may have bottomed today.  The downside force and volume is not showing we are going to collapse here.

If we do not bust down through today’s lows on a dramatic increased volume then it puts the bottom scenario in, in my opinion.  How permanent the bottom is remains an open question.

In my past experience these volume shrinkage comparisons are usually the truth tellers. Everything else is a smoke screen.

The market is still making lower highs and lower lows, so at the current critical resistance level a move up from here would validate support and seal the bottom for now.

Volume analysis is what allowed me to call the bottom in August 2010.  Could it be that we are at a similar juncture right now?  We will have to wait and see if the market can build up more downside volume to get a more meaningful decline going.

The beauty of technical analysis of the sp500 is that it need not be excessively complicated.

Simple is great especially when it comes to the stock market timing.  Simple is usually what makes the most sense.

In the long term time frame the simple argument is that we are topping in a major head and shoulders pattern based on several important indicators.

In the short term the simple argument is that we are currently trading in a rectangle formation that is a continuation pattern and that price will resolve to the downside very soon, as early as next week.

It is starting to look like we will get a negative close for the market and this would set up a very bearish week next week which would validate my longer term bearish forecast.

The simple bearish argument for the near term can be summed up in this chart:

The chart of the sp500 above shows that the green shaded area is the bullish zone break up and recovery area.  The red shaded area is a bearish break down area which I believe will occur next week.

The yellow dotted line that starts up at the top near 1415 is a down trend line that meets todays HIGH PRICE.  Thus we can presume that this downward force will stay intact and cause prices to resume downward again next week.

Further, the red horizontal dotted line represents new recent resistance  and so far the market has shown that it is unable to recover back above this line. Thus we are to presume bearishness.

If the current market weakness holds into the close (about 1+hour) then I have to tip my hat for significant bearishness in the tape next week.

But ultimately regardless of my opinion, the chart above shows the very clear and precise battle lines that are drawn for the sp500.  It shows that the sp500 must not make a higher high early next week.  To keep bearishness we should witness prices early next week in sp500 that are at or below 1360.  We must see 1360 as the max high early next week to keep bearishness intact.