US S&P500 at 1,358. First support level at 1,278 held.

Real test to come.

When I appeared on SWITZER on 10 May 2012, the theme for the show was ‘Sell In May and Go to Bahrain’, and that was exactly what I did. This is marked ‘May’ on the above updated chart of the S&P500.

My first support level had me eying 1,278 or 5.6% lower, just above the 200-day moving average.

On Friday 1 June 2012, the day of my flight returning from Bahrain, the US market fell 2.4%, closing on 1,277, just one point below. Perfect! The following day, Monday, the index traded down to 1,266 and again closed on 1,277. Perfect again.

When you identify a support level, and the market closes ON IT and it starts to trade back up, then the chance of it bouncing strongly is HIGH. This is exactly what we have now.

I had a level below that at 1,249 marked by the big S, as major support, which was 7.7% lower. This was never hit.

So how do I see the situation?

Negatives

We’ve now had a very ‘nice’ and shallow fall. So nice and shallow, it almost feels inadequate.

If you watched my interview in May, and had been following my commentary in the Switzer Super Report, I had been alluding to a ‘clear out’ on the downside that was sorely needed. This is so that a solid base may be formed from which to launch off into higher levels. It doesn’t feel like we’ve got enough of that.

The index at 1,358 is up 17% from the lows in November 2011. That was only seven months ago. On that basis, it is still ‘too high’.

This is the reason for my little ‘l’ on the chart, which marks a level of 1,378, or 1.5% higher than where the S&P 500 is at present. We need to get through this level before we focus hard on the upside.

Positives

1) Momentum is clearly on the upside now with most indicators pointing to higher levels.

2) The 200-day moving average is now pointing firmly up, as indicated by the yellow line.

3) I have a Target marked ‘T?’ at 1,422, or 5% higher from here.

There are sufficient and indeed good technical reasons for it to trade higher from these levels. This is despite all the fundamental news flow that continues to be predominantly negative. If the charts are telling me things are pointing up, I switch off the negative news flow on the TV and other media. How it clears and trades at and slightly above the 1,422 level will determine how high it will go.

Shanghai Stock Exchange: Now at 2,297. Target level: 2,424, up 5.5%

Another chart I’ve been looking at is the Shanghai Stock Exchange. I have said in previous notes that support is at 2,244, or 7% lower, and this is marked ‘S’ in the chart.

Shanghai has traded lower, but it hasn’t fallen to that level. It has gone as low as 2,276, or 5.8% lower.

Negatives

1) 200-day moving average is still pointing down. I expect to see support for Shanghai stocks at 2,244 – the same level as before, and that would be 2.4% lower than present levels.

Positives

1) The index is trying to stabilise above the low of 2,319 realised on 2 July 2010. It is currently at 2,297, only 22 points, or less than 1%, away from this level.

2) The top in this current round of volatility began on 4 August 2009 when the index peaked at 3,478. The low was reached at point one above before it began to bounce around, which is what we have had since. The current level represents a 34% fall from the August 2009 peak.

As much as this is not desirable, it is not the end of the world and reflects an index that was too high. If the index can stabilise here and recover, the gains could be more sustainable. This second point emphasises point one’s importance.

3) I have a higher target level at 2,424 marked ‘T’, or 5.5% higher than present levels. Trading up here and how it trades in this range is very important.

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