Weekly outlook: tough sledding ahead

OK, let's start with the easy part. Here's a monthly chart of the SPX going back to 2008, just before we fell off the cliff into the Great Recession.

Compared to the fall of 2008 (pun intended), the last two months don't look so bad, do they? However, take a look at the stochastic on the bottom of the chart. It's still just coming off its most oversold levels. And just when does the market rally? Well look at where the stochastic was in July 2010 and March 2009 the last two turning points. That's right, down near the zero line. By this measure we have at least one more down month ahead of us.

This theory is supported by the two regression trend channels on the chart. Notice how we fell out of the RTC in May 2010. That was followed by another down month before bottoming. Where are we now? Well we just fell out of the latest RTC. Clearly, on a monthly basis, this market is going lower before it goes higher. Position yourself accordingly.

And if you need more supporting evidence, look at the Morningstar Market Fair Value graph.

This is a one year chart. Just off the left edge is the line crossing under the 1.0 level in May 2010. The market then sold off until July. The Morningstar chart bottomed right there, with a reading of 0.90. Today's reading is 0.96. The current market downtrend is not going to end as long as the Morningstar numbers continue to edge lower.

I know, you're saying, but what about this week, Michele? OK, this is where it gets interesting. Here's a daily Dow chart with some extra added tea leaves.

Point X is where we are now. Points A, B, C, and D are all places where the last two descending RTC's intersect the 200 day moving average (and I'm using the SMA, just to be generous). I don't think the real fireworks will start until we get to there. Right now, I'm fairly certain point A is off the table. But we're still inside the latest RTC, and that puts point B four days away.

If we manage to climb back into the May 1st RTC, then points C and D are on the table. C is on 6/23, and D is on 6/29. My best guess is that we're headed for point C, at 11,820.

Now here's where it gets interesting. As I've pointed out in my last two posts, the Dow has fallen more than six weeks in a row only five times in the last 82 years. And the longest losing streak in that period was seven weeks. The Dow has been technically oversold for a week now. And the chorus of gloom and doom on the net is rapidly reaching a crescendo.

Like today's headlines from marketwatch.com, "Economic data may be as grim as bad summer movie", "Another losing week looms", "How to time you exit move". Holy moly! On a purely contrarian basis, I'd say we're going higher. Are things really that bad to merit a record that's only happened 5 times in 82 years?

And while it's still early (I may update this post later tonight as we enter the Night Owl's favorite time of day around 2 AM) the futures are all actually up right now at 8:40 PM EDT. ES in fact is up 0.20%. And the ES short stochastic has actually now reached an inflection point, intimating that a short term bottom may be at hand.

Also the VIX is now at the upper end of its recent range.  It also hit its own 200 day MA last Friday and was rejected there.  That suggests a lower VIX tomorrow, and implies higher sotcks tomorrow or Tuesday.

It's still a bit early to call it but I'd say that for tomorrow at least, things aren't looking all that bad. That's all she wrote... for now.

2 AM Update: Well the ES has given back some of its earlier gains this evening but it did test Friday's closing lows once and that held.  We're still up 0.14% at 1271 right now and the daily pivot it just 4 points away at 1275.  That's the key number for tomorrow.  If we can break above that early in the day, then we're going higher.  If the 1275 level is rejected or we never get close, we're going lower.  At this point, the overnight action is looking sort of like the overnight from June 8th and that led to an up day on the 9th.  We'll see.