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SPX Daily Chart 8-4-14

Normal Seasonal Weakness Weighs on Equity Indices

With a return of seasonal volatility to financial markets last week, we believe this is a good time to review and evaluate our earlier views. In prior commentaries, we were very cautious and reluctant to add any further exposure to equity index complexes as U.S. equity markets extended to historic highs this past June and July. As noted in the following previously posted charts:
 
SPX Daily Chart late June:
06-23-14 SPX Daily Headline Chart
 
SPY Daily Chart early July (after return from U.S. July 4th holiday):
SPY Bearish Reversal Pattern 7-7-14
 
Internally we were monitoring the following weekly chart as well, which gave us pause and reaffirmed our decision to stand aside and protect year to date gains.
 
SPX negative divergence warning 7-7-14

 

So far so good as it appears indices have indeed stalled at anticipated price zones and now searching for value and support at lower levels. So where do we go from here?
 

SPX negative divergence warning 8-4-14

Unless prices rebound rapidly to negate the current bearish trend reversal, equity indices are likely to target the 5-6 percent corrective phase objective (for SPX ~1855-1885 price zone).

SPX Daily Chart 8-4-14

If the SPX 89 Day Exponential Moving Average (one of our favorite measures of intermediate to longer term support/resistance) is retained, the current throwback will be shallow and likely to rebound quickly. If this support level is violated, the objective of a descent to the 1855-1885 price zone with probes of the ascending 200 Day Moving Average remains intact.

It is suggested to use prudence and refrain from extreme asset reallocation until after the normal summer doldrums have passed. Risk of random price spikes (up/down) is elevated with any tests of the 200 Day Moving Average offering favorable entry points for additional exposure. IF the 200 Day Moving Average is violated with confirming volume, there will be plenty of time to reaccess market conditions and make appropriate assent allocation decisions.

Keep in mind the ole'Traders saying that "Market Tops are processes and not single events". Until proven otherwise, the current weakness is nothing more than seasonal and a return of Buyers anticipated after the U.S. Labor Day holiday in early September as large funds/investors defend year to date performance.

With the above technical analysis in mind, our quantitative indicators and metrics have entered into extreme oversold levels with a reflex pullback (bounce) anticipated at anytime. The quality of an inevitable rebound will determine the intensity of the current corrective phase. Recapture of Friday's highs without further "lower lows" will likely see a test of overhead resistance (former moving average support).

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