Friday, August 21, 2009

The SP500 After the Glowing July Existing Home Sales Report
After the e-mini’s launched to new move highs following the better than expected July existing home
sales on the back of an $8000 tax credit that expires in the next few months, I received a call from an old
floor trader from the SP500 pit. He asked me for several answers.

In no particular order, he wanted to know how much the SP500 had rallied off the March 09 lows thus far.
I said +54%. He asked me how far had the SP500 declined off the Oct 07 high to the March 06 lows. I
said -58%. How much higher would the stock market have to climb to reach a 58% gain off the March
lows? I said 1052. Then he asked where is the 50% retrace on the log scaled chart. I said 1028. We also
discussed the Dow’s seven month 55% initial rally off the 1974 low when fiscal stimulus and tax cuts led
to a quadrupling of the Federal Budget Deficit. After the initial 55% rally, the Dow fell -12% over the next
few months. Thus far, the SP500 has rallied 54% in less than six months since the March 6 2009 low. One
percent higher would target 1032.

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 Dow 1974-1976

He also asked me how much higher the Oct 07 high over the July 07 high was. I said 1.3%. Doing some
quick math, we figured that 1029 would be a 1.3% higher high than the August 7 2009 high. Thus, we
found that there is a great deal of price clustering in this 1028 to 1052 price zone. It will be all the more
difficult to bust through this zone because the 18 month moving average which has defined virtually all

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the momentum in the SP500 since 1994 is sloping bearishly through 1040. First time up to this moving
average should prove almost impossible.
Three Peaks and a Domed House
Finally, the SP500 is reaching towards its point 23 high off the March 6 low on the intraday charts. The
point 23 dome is usually formed through some sort of stop run like we are seeing right now. We note on
the chart below that even the Fibonacci external ratios target 1033 to 1042 for a potential dome high. Yes,
there may be some upside overthrow, but on balance we should see little if any trade above the 1030-1050
price band without help from a higher power than our policymakers. This is going to be the place to look
to adopt shorting strategies on proven reversal signals such as false auction highs that leave “tails” on the
candlesticks. More on proven reversal signals in upcoming reports.

As touched on in this mornings report, the dome should form during the Sept 1 Vehicle sales and ISM
reports and the Sept 15 Retail Sales and Sept 17 Philly Fed reports. The positive upticks in these reports
are simply the result of govt incentives to stimulate consumer purchases of existing homes and
automobiles. The auto stimulus runs out on Aug 24, and existing home buying probably peaked in July as
folks do most of their moving before the new school year that begins in August. Consumer and Mfg
reports beyond mid-Sept be will prove difficult to be as glowing as what we have seen in the summer
months.