For the First Time in 51 Trading Days

by D. R. Barton, Jr.


Two weeks ago, we looked at an interesting indication of how long and steady the S&P 500 bull run has been since the swing low was made on December 19. The chart below shows where we stood then.

 

1

 

For the two weeks following, we saw more of the same - a slow grind up.  Monday, March 5 marked the fiftieth straight day that the market had traded above its 20-day simple moving average without touching it once.  On Monday, the price came within one point, and even though it looks as though there could have been a touch in the chart below, it didn’t quite make it.  Then came Tuesday’s big down day, and by the looks of it, the complexion of the market could be in for a change. 

 

Here’s the chart as of the afternoon of 3/6.

 

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The reason for this unusually gradual upward move—a move that hasn’t been tempered by any meaningful pullbacks—was an extremely balanced battle between positive and negative forces in the market.

 

U.S. economic data has been mixed with a positive bias. Continued high corporate earnings and profit margins coupled with an improvement in the employment picture over the last four to five months have combined to overcome any negative numbers.

 

Meanwhile, the credit crisis in Europe has run the gamut between dismal and hopeful.  The last significant news saw the European Central Bank launching round two of its Long-Term Refinancing Operation (LTRO), loaning out cheap money to buy bonds in needed countries at about 12% higher than the consensus estimates.  This action promises to keep the money flowing.  Combine that with the picture of money creation in the U.S., and you have a continuing liquidity glut.  The Chart of the US M2 money supply is below.  M2 tracks the amount of money and “close substitutes” for money.

 

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As you can see, year-to-year percent change in money supply is as high today as it was at the height of 2008 credit crisis.

As I said two weeks ago, “bets against the equities markets are tough when new capital is floating around.  However, when this newest version of the ‘sugar high’ wears off, look out below.”  With that in mind, what are some signposts we could look for that could form support for a long-overdue pullback?  To find our next key support level, we have to move from a chart of the S&P 500 cash index to one of the traded instruments.  Let’s look at a chart that shows the S&P 500 futures (day session only).

 

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You can see in this chart that we have an unfilled gap from about 5–6 weeks ago;  I’ve drawn a magenta line through it so you can see it clearly.  This gap is a strong technical support level that lots of traders will have their eyes on.  If we hold this level on a closing basis, then more upside is imminent in the near term.  A drop below could send the market down to test 2012 lows.

As always, I’d love to hear your comments and feedback.  Send them to drbarton “at” vantharp.com.

 

Great Trading,

 

D. R.

 

 

 

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

 

 

 

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