Summer / Election Rally Postponed Three Weeks

Over the long holiday weekend I reviewed various of our cycle charts and chart updates from the Chartstore.com.  Those charts along with our longterm trading computer model point to a big risk of a captitulation move down to the 1100 to 1120 area for the S&P 500 over the next three weeks, a 10 percent decline from current level.  The fact that the 1294 area did not hold and the fact that a quick reaction rally didn’t bring the market back above that 1294 area when it was penetrated stand out as big warnings.

Most likely the fundamental driver of a capitualation move will be earnings announcements.  Alcoa on Tuesday and GE on Friday will be the big ones to watch.  The Oil and gold markets are headed lower and should provide a little bounce for the stock market initially this week.  This means that little rallys up to the 1273 – 1290 area basis the S&P 500 should come first this week.  We will use this area to unload long stock positions and will move from our current 23 percent net long position to around a 30 percent net short position.  We are staying short our oil, oil stocks and gold stocks as after this three week period they in our opinion should be the biggest decliners, probably on a 3:1 ratio compared to something like the financial or real estate based sectors.

The cycles would point to the later summer rally going to the 1360 area on the S&P, higher than current levels,  but a lot of scary stuff could happen in the meantime.

6:21 AM CDT