Graham Summers’ Weekly Market Forecast

Last week I
mentioned that barring any additional intervention (monetary or otherwise)
stocks would roll over. That is precisely what happened with the S&P 500
falling to test MAJOR support around 1,040 twice.

We looked
about read to fall off a cliff until Friday when Fed Chairman Ben Bernanke
stated in his speech that the Fed stands ready to do whatever is needed to
fight the financial crisis. It wasn’t a direct monetary intervention, but in
these desperate times verbal intervention is good enough, and traders gunned
the S&P 500 higher back into the gap created by the Monday/Tuesday
sell-off.

The Big
Picture below shows just how crucial the 1,040 line is for stocks. If we had
taken it out then the next stop would be 1,020, and then 1,000 or even sub 1,000 in
short order:

I think
we’ll be hitting those lines relatively soon. However, it may take some work to
get there. As you can see, since breaking out of their bearish rising wedge
pattern the week of August 9, stocks have entered a clear down trend channel.
Friday’s late day rally brought stocks right up to the upper trend-line.

Judging from
this pattern I would expect stocks to roll over again this week and re-test
1,040 before ultimately heading lower. The upper trend line of this trading
channel has acted as stiff resistance before. We’ve also got major overhead
resistance at 1,070 and 1,080 (see the red lines below).

However, an
alternative scenario would be for stocks to rally to break above the upper trend-line
and test the 50-DMA (1,084), much as they did following the Flash Crash in
early May.

Indeed, it
is not uncommon to see stocks mount a final rally to “kiss” their 50-DMAs
before rolling over to new lows. As I write this Sunday evening, the S&P
500 futures are rallying and look to have just
broken the upper trend-line of the downward trend channel, which indicates this
final rally and “kiss” scenario might be how we start out the week.

Regardless,
the BIG PICTURE scenario is that stocks are heading downward and that this
latest upward move is a dead cat bounce if anything. We have a clear Head and
Shoulders pattern with a downside target of 975 on the S&P 500. As I write,
stocks are literally on the neckline for this patter. A break down here would
mean a new wave of heavy selling (similar to early May) bringing the S&P
500 down to 1,000 in a hurry.

Thus, in the
intermediate and long-term, I believe stocks will be down sub 1,000 on the
S&P 500 within a month or so. However, in the near term, for this week, I
expect continued weakness with perhaps some choppy action between 1,070 to the
upside and 1,040 to the downside. A break above or below either level would
indicate something larger has begun.

In the case
of a break above 1,070, then we will likely rally to “kiss” the 50-DMA at 1,084
before this dead cat bounce rolls over and we break the massive neckline on the
H&S pattern.

In contrast,
a break below 1,040 would give a clear cut of the neckline on the H&S
pattern which would mean 1,020 then 1,000 on the S&P 500 in a hurry.

So be on the look out for either scenario
this week.

Good Investing!

Graham Summers

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Comments

[TraderTimm]

I still think we're going to get a wiggle higher before rolling over. Been difficult in the last few days from all the "Hail Mary" the Fed is doing. (And continuing to do, of course.)

AUDJPY and EURUSD just sitting where they were from 4pm EST.

Guess I'll learn more from the Nikkei open.

Good trading, guys!

[sbenard]

Thanks for the free reports on your website, Graham!

[sbenard]

Great analysis! Thank you!

I use a completely different form of tech analysis. I call it Dynamic Technical Analysis. However, my own analysis concurs with yours.

Great minds think alike?!

[tony bonn]

"the Fed stands ready to do whatever is needed to fight the financial crisis"

there is no crisis, the economy is in a robust recovery smothered in green shoots, the banks are solvent and axious to lend, and banksters are snuggled securely in their central park apartments....

[RockyRacoon]

Rest assured Uncle Ben will come up with a neck-wrenching revelation soon. 

Or not!  Gotta get those bonds propped up. 

We are in for some chart-busting surprises either way.

Think I'll go get some more silver Eagles...

[dan22]

The Amazing Story of the Hui Xing Gold Mine Ponzi Scheme in Inner Mongolia

http://israelfinancialexpert.blogspot.com/2010/08/chinas-shark-loan-ponzi-finance-amazing.html

[HitTheFan]

I get a much lower downside target for completion of the head & shoulders, more like 875.

Maybe 975 was a typo?

[Robslob]

Ever think technicals are like the matrix?

Designed to give you a reason and range for consistent unnatural occurrences of events throughout the marketplace.

Once I took the red pill I finally realized two important things:

1) The market does not exist

2) You can never go back into the matrix.