Saturday, October 20, 2012

Market Forecast Week 10/22/12

The U.S market plunged on Friday erasing all of October's gains. The drop was mainly due to the multiple earnings miss by U.S Corporations: AMD, GOOG, MCD and GE. All the major indices broke their short-term support levels, and are now testing September's supports levels.

In the chart below I drew Fibonacci retracements to test the S&P 500 short-term movements. It seems like the S&P 500 failed to break key resistance levels of 1468.5. In addition to that, the S&P has been trading in a channel since September (between 1431.7 and 1481.1), which means that if the index breaks the 1431.7 support levels we could see the markets reversing to the downside.

While the short term markets movement  seems to be bearish, the long term movement is still bullish. To validate this argument, we can see in the chart bellow that the S&P is still trading way above its 68.1% Fibonacci retracement which is considered to be a positive long-term signal. That said, if the index break below Fibonacci support levels of 1401.1 and 1376.4 we will probably experience a strong downtrend move in the markets.

While the markets were in "correction mode" this week, the dollar index seems to have regained some strength. Both the MACD and RSI are showing bullish signals which means that the trend could reverse to the upside in the short-term. In the meantime we can see that using the same indicators the S&P is losing its bullish momentum.

To conclude, I think that the S&P 500 took a big hit on Friday, but it still did not break numerous support levels. Also, as you can see in the chart bellow there is a clear inverse relationship between the dollar index and the S&P, which means that if the dollar break the 80.2 key resistance level we will probably see a bearish reversal in the markets.

Following the forecasts that I stated above, this upcoming week I have two ETFs on my watch list: $UVXY and $XIV. If the S&P 500 indeed breaks key support levels, the volatility in the market will increase and thus $UVXY is going to benefit from that. On the other hand if the market fails to break the support levels the volatility will decrease and the $XIV will be the way to go.

Amine Bensaid

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