Larger rally likely Tuesday, 30 day view bearish

Monthly SPX

Why I went bearish

Last night I wrote that we were overdue for a rally either today (Monday) or Tuesday. Turns out we got it Monday, though it was essentially all over in the first two minutes of trading. It was all downhill from there, and after the "Libya effect" subsided were were left with a puny 37 point gain in the Dow. But I'll take 37 points up over 600 down any day.

But tonight I bring you the SPX monthly chart, because today the weekly Ticker Sense Blogger Sentiment Poll came out. This represents peoples' opinions on where the SPX will be in 30 days. I voted "bearish" but it was a very difficult decision.

Looking at this monthly SPX chart we see first how the SPX fell off a cliff as soon as it exited the rising regression trend channel in July. Lesson one: do not underestimate the predictive power of the RTC. But note also how this month we dove and dove with nothing to stop us, until we hit... the 200 month moving average. The 200 MA is now 1102.55. The August low (so far) is 1101.54. Coincidence? I don't think so.  Lesson two: do not underestimate the 200 month MA.

The 200 month MA is powerful support. It marked the lows of 2010, where the bears tried to break it for four months in a row, unsuccessfully. But in October 2008, we broke under it and then went on to drop another 33%. So the question is: is now more like 2010 or 2008? And that's the crux of the problem. In some ways, now is not like 2008. In other ways, it's worse.

Here I give you what I'm calling the Chart of the Month:

This comes courtesy of the absolutely excellent daily newsletter from the Wells Fargo Economic Group (see http://www.wellsfargo.com/economicsemail to subscribe).

Today's topic was "Philadelphia Fed Index: Can It Predict a Recession?" and looking at this chart of GDP growth vs. the Philly Fed with recessions highlighted, I've got to say the answer is yes.  Out of the last seven recessions, every single time the PFI went under zero, we had a recession.  Seven out of seven.  The latest number?  Negative 30.7.  QED.  The next recession is coming, if it's not already here.

So unless Uncle Ben can pull a miracle out of his hat at Jackson Hole or soon after, things are looking very not so good.  Also I note that while the number of bears in the latest Ticker Sense poll increased, they're still not so plentiful as to constitute a bullish contrarian indicator.

The short run

So that's my longer view.  But what of tomorrow, Tuesday?  My pessimism does not extend to tomorrow.  In fact, things are looking not so bad right now.  The Dow put in an inverted hammer which is bullish.  And unless tomorrow's action is spectacularly bad (which as we've seen enough of lately it certainly could be) we could easily exit the four day descending regression channel the Dow is in now.  That would be a bullish setup

Meanwhile, the VIX today did come down as expected, although it did it in odd fashion on a gap down green candle.  It's a bit hard to tell much from that so we look next at the VIX futures.  The VM had another gap up day, even bigger than Friday's.  I'm looking for this gap to fill in, probably tomorrow.  Lower VM -> lower VIX -> higher stocks.

But the piece de resistance tonight has to be the market futures, all of which are up solidly at 1 AM EDT.  ES is now up 0.89% and has been trending higher since 8 PM.  More importantly, at 1133.25 it is now above its new daily pivot of 1127.  Tuesday this number is key.  Holding above it or bouncing off will be bullish.  Falling though it, bearish.  Also, ES has some pretty good support not far from here in the 1110-1120 area but very little resistance up to 1170.  Tonight the risk/reward favors the upside.

Personally, I think we're going higher tomorrow.

ES Fantasy Trader

Given all of this, tonight it seemed appropriate to go long again, so I picked up 10 more ES at 8:32 PM at 1123:

BOT    10    ES    false    SEP11 Futures     1,123.000    USD    GLOBEX    AUG 22 20:32:13

Right now, it's looking good.