Chart of the week: a buying opportunity lies ahead

Print This Post A A A

The last time I spoke with Peter about the all-important S&P 500 chart was on 10 May 2012, when the theme of the interview was ‘Sell in May and Go to Bahrain‘. And that’s exactly what I did.

So now that I’m back, do we buy again?

Chart update: the S&P 500

In my interview of 10 May (which I encourage you to click on and review if you haven’t seen it), I had two support levels for the S&P 500: 1,278, which was 5.6% lower at the time, and 1,249, which was 7.7% lower at the time.

The index has now hit 1,278 after dramatically falling 2.5% to close at 1,277 on Friday night. I have since refined my levels, with a target on the downside of 1,228, which is 3.8% lower from where we are now.

The above chart is updated for Friday’s close from my last appearance on Switzer. I have marked my 10 May appearance as ‘May 1,354’, and kept the small ‘s’ at 1,278 as Support and the large ‘S’ at 1,249. These support levels are unchanged.

What I like about the chart

1) I actually disagree with the saying, ‘What goes up, must come down’ because if it goes up steadily and calmly, then it does not have to come back down. Unfortunately, the S&P 500 was going up way too fast – it was up 22.5% since the end of November 2011 at 1,160 on the chart to the high in March 2012 of 1,422. When it does this, then it is TOO MUCH and ‘What goes up in a ballistic fashion, MUST come down’.

Despite the dramatic falls on Friday night, to go up 22.5% in five months means we need to return to some level of normal returns. That means falls are needed and healthy if we wish to make those 22.5% gains real and sustained for the longer term.

For now, we have a pull back to my first level of support, 1,278, closing on 1,277.

2) The next level of support – the large ‘S’ – is now in play at 1,249. Not only is this in focus, I fully expect it to go through this level as I have a new target.

3) My new target is marked ‘T’ at 1,228. This is now 3.8% lower than previously.

For regular viewers and followers of my commentary, you will know that when I have a target projected, I expect the market to go there. This will make the falls from the high of 1,422 a fall of 13.4%. Or from the base of 1,160, a rise of only 5.8%. This is reasonable. Should it pull back to this level, and I expect it will (not so as to rejoice as there is further loss of value in people’s portfolios), this would represent a return to a level of normality from which longer term sustained gains can be rebuilt.

Put another way, it represents an opportunity to buy at much better levels if you did not buy earlier. Be patient and wait for now.

What I don’t like

1) The falls have only just begun. My previously stated ‘support’ level (being a large support at 1,249), is expected to be broken. This is not good.

2) My target level is below the above mentioned support. It would have been nice if the target was closer to the second support.

3) A significant break of 1,228 without a decent bounce back up will mean something uglier is afoot in the macro economic situation. For now, the charts are not indicating anything untoward. However, we do need to be vigilant.

Important note: My views are NOT for the long term. My method results in views expressed that relate to an outlook that lasts weeks or at most months. For example, my view on Shanghai’s Index has for now been met and completed since 22 March 2012, 11 days later. Currently regards Shanghai, I am in a cautionary observant position. Your utilisation of this information needs to take into account the time frame I set. The stocks recommended as “Steady as she goes” may be held for the longer term, which for me means months.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should, before acting, consider the appropriateness of the information in regards to their objectives, financial situation and needs and, if necessary, seek professional advice.

Also in the Switzer Super Report

Also from this edition