Securities Research Services

Thursday, May 29, 2008

Window Dressing Rally Continues

Today we want to take a look at where the SPY might be headed as the end of the month buying spree winds down.

Note on the daily chart below that the SPY broke down from a rising wedge pattern after testing the area of major resistance we have repeatedly pointed out over the past few weeks.

After a steep decline last week, the price found support at its flattening 50-day moving average. We have expected some sort of a bounce this week due to typical end of the month run ups that occur when fund managers buffer their portfolios by putting their extra cash to work for month end reporting statistics.

So far the bounce has been minor, but technical indicators reset to buy signals and it now looks probable that prices will run back up to the $141.50-$142.00 area where previously resistance took hold.

Now, we don't know what the future holds. All we can do is weigh the probabilities and try and determine the most likely outcome from those probabilities.

With that in mind, we will be watching to see how the market behaves when and if it reaches back to the area of major resistance that has thus far proven to be an area where massive supply has turned back rally attempts. An outcome we will be watching for is a kiss goodbye at resistance, which is a typical throwback pattern that often occurs once a major breakdown has occurred, which happened last week when the rising wedge pattern saw a high volume plunge through its lower band.

If prices reach back to this area and start to turn back, that will be the signal we are looking for to add to our short position added early last week.

Since we don't know the future, it is best to be prepared potential problems with the short position. If prices don't turn back from the $141.50-$142.00 area, we may see a situation where the market has shrugged off the selling pressure and where prices continue to rise as they ascend a wall of worry. While we don't expect this, it is something to be aware of and to be prepared for, which would entail covering short positions.

The bottom line here is that you will want to wait for confirmation, which would entail waiting for a failure at resistance before adding to your short positions. Risk:reward here continues to favor the short side, but if resistance fails, that would change. Flexibility and a position of agnosticism are essential to succeeding in the markets.

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