Monday, October 29, 2012

Market Forecast Week 10/29/12

The U.S. markets broke the 23.6% Fibonacci support level which was mentioned in my previous post, following that down move the markets traded sideways for the rest of the week. The S&P 500 is actually testing the 38.2% Fibonacci level or 1401.1 support level, if the market breaks the 38.2% support level we will undoubtedly see the S&P drop by at least 25 point to test the next critical level of 50%. On the other hand if the market succeeds at not falling bellow that support level we could see the market make a run for new highs of the year. The graph bellow shows that in September the S&P was in a similar position and it did not break down bellow the 38.2% Fibonacci level, following this bullish move the market made a run up to reach new highs.

Even though we have some technical indicators that are showing possible reversal (i.e. Bollinger Bands; the S&P is trading at the lower Bollinger Band which is a sign of possible reversal for this week), the markets are in still bearish.

Some Momentum indicators that show bearish market condition:

Slow Stochastics: Markets are in oversold condition, the K line is bellow 20 and it will stay there until we see a reversal.
MACD: We have a bearish divergence bellow the 0 line which is a bearish signal.
RSI: Is still negative and it did not show much strength this week.

Finally I like to have a look at the simple regression line for the S&P to have a clear idea on the markets future movements. As we can see in the chart bellow the market have been trading bellow the regression line since October 19. I believe that a sudden move in either direction will be a clear indication for future movements.

Last week I gave two stock recommendation in order to profit from the forecasted market conditions, UVXY and XIV. Since the markets broke the 1431.7 support level, like I forecasted last week we saw a lot of volatility followed by that move to the downside. The UVXY went up from $27.78 to $33.42 which translates to 16.12% upside move in two trading days. For this reason I like to invest in volatility stocks when there is a lot of uncertainty in the markets. On the other hand, if again the markets succeed at not breaking key support levels XIV will be the way to go because the volatility in the markets would have settled down.

Amine Bensaid

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