Major Support Levels to Watch

It's the weekend, and that means - everyone's Bearish! Surprise, not. This weekend, though, there may be reason to be a bit more cautious than usual about the market's direction. The Bull market of the past half-year finally has had a couple of down weeks. Furthermore, Friday May 31 2013's close violated a key support level and scared all the longs.

Does that mean we are headed straight back down to 1100? Or at least 1600? Nobody knows. But one thing you have to expect from the market is  - the unexpected. You were, um, expecting that, right? Since everyone expects a big drop, we just might cruise right back into the mid-1650s where we were before the big money managers left their offices to board their float planes for the Hamptons on friday afternoon. Personally, I rate the possibility of a quick snap-back at 50% or higher. Betting against this market has been very unwise this year.

But we have to be prepared. The late friday sell-off may have been deadly serious. Several indicators appear to be lined up for a real pullback. The common chart pattern of the major averages has that hanging look that, in your usual equity or futures chart, often precedes a real buster of a waterfall down. It's a good time to really listen to the market and assume nothing. In other words, pay attention to what happens. We can do that in part by watching how the market reacts at certain key levels.

The first level to watch, strangely enough, is right where the market is now. The futures chart below of the S&P 500 E-minis shows that we are sitting right on the 30-day moving average. The futures also are sitting smack in the middle of the old uptrend channel, which is right where they should be. It's a good level to hold, but moves lower usually don't end in the middle of the channel, they go to the bottom of the channel because everyone kind of expects that and helps make it happen.

If the current  level does not hold, the next levels to watch include the 50-day moving average and the bottom of the uptrend channel, which are in the same general area. The channel bottom currently is around 1590. Slightly above that, at 1597, is the 50-day moving average. Both of those levels are very significant. They also will be moving up slightly every day for the foreseeable future, and buying at a rising 50-period moving average usually is a good plan, with a stop somewhere below. Just be aware that technical moves down often overshoot the true support level, but not for long (if they are going to hold at all, that is). So you could see a quick spike down to, say 1583, then a quick reversal back over 1600 and higher from there after some consolidation. Wouldn't surprise me a bit. That would be roughly a 100-point pullback, just like happened last year at this time. But anything might happen.

Besides those levels, on the chart below are old support/resistance levels. I put those in for future reference, though they are not in play at this moment: 1594, 1568, 1533.

E-mini S&P 500 Futures on June 2 2013

Another way to look at a real pullback is with Fibonacci Retracement lines. The difficulty with using this indicator is that, if you use the true start of the current move last year, the Fib lines that usually matter, at 38% and 50% retracement levels, are still so far below that they are not yet in play. This advance is so old and entrenched and its scale so vast that normal technical indicators like that have lost some of their utility. The 23% line is at 1605. It might give some support, but that usually is not a major pullback support line.

E-mini S&P 500 Futures on June 2 2013 with Fibonacci Retracement Lines based on November 2012 low

Taking some liberties with use of the Fibonacci tool, and assuming April 17 2013 as the start of the current advance paints a more interesting picture.

Futures June 2 2013 Fibonacci Retracement Lines based on April 17 low

Notice that with this interpretation, we already are at the 38% retracement level, and that the 50% level is only 20 points lower, at 1627. That's not nearly as scary a pullback for Bulls to contemplate.

The Hindenburg Omen

The current buzz is that the ominous "Hindenburg Omen" was triggered (confirmed) on May 29 (Wednesday). The Hindenburg Omen technically applies only to the Down Jones Industrial Average, though the underlying reasoning is sound across other averages. You hear about it only now and then, and it has a checkered history in terms of predictive power. It seems to gain publicity when some feel the time is ripe to scare some folks. Nevertheless, to be scary it has to have some kind of germ of truth. No crash since 1985 has occurred without a Hindenburg Omen preceding it, which certainly sounds scary. However, there have been a bunch of confirmed Hindenburg Omens over the years that have not led to much of anything. It is one of many things that may precede a period of what technicians like to call "volatility" and normal people call "a market drop."

The mere fact that some are claiming a Hindenburg Omen warning may itself account for the late-day sell-off on friday. Who wants to hold over the weekend when a major crash alert is in effect? That takes us into self-fulfilling prophecy land. But that doesn't mean a crash necessarily must follow.

I want to put a few thoughts out about the Hindenburg Omen. It has gotten a lot of press since the close on friday, but supposedly it came into effect after Wednesday's close. The ones who "decide" that it is in effect are not part of some philanthropic institution. That if didn't suddenly become a big deal until later should tell you something. The ones who knew about it early were going short the futures at 1648 and probably sweating very mildly when they bounced up to 1657 early on friday. But they would have been smiling later. Trading these things can be tricky and often a big mistake unless you are in the loop from the beginning.

The actual details of the Hindenburg Omen are unimportant. Technicians can't even agree on the criteria for a Hindenburg Omen. The addition of ETFs to the market has confused the Omen's utility further. You can't really pin down how reliable the Hindenburg Omen is because everyone who looks at it uses a different definition of what it is and when it was in effect or confirmed. Must it be confirmed once, twice, thrice, within two weeks, consecutively, within forty days, etc. Everyone has a different answer, and even the guy that first thought of it, Jim Miekka, has changed his version of it over the years. There are other quibbles, but this is the sort of stock market myth with a creepy name that you will be hearing about, so you should be on your guard until, as they used to say in the movies, the coast is clear.

The one statistic I like about the Hindenburg Omen is this: according to at least one (Wall Street Journal) study, after the trigger of a Hindenburg Omen, the likelihood of a 2-5% correction is 92%. Those are heavy odds, and we are all about playing the odds. So, just for an indication of what a Hindenburg Omen correction might mean, I have drawn those lines in on the futures chart below. They actually aren't that far off after friday's drop. There is no "bottom" call for a Hindenburg Omen, its purpose ostensibly is as a total crash warning. So, you take the lines on this chart as pullback possibilities that might be far exceeded.

E-mini S&P 500 Futures on June 2 2013 with Hindenburg lines

I have put in the Hindenburg lines for the Dow Jones Industrial Average below.

Dow Jones Industrial Average on June 2 2013 with Hindenburg Lines

Finally, since we are talking about the Dow Jones Industrial Average, I have put in a chart with Fibonacci Retracement lines for that market average below.

Dow Jones Industrial Average on June 2 2013 with Fibonacci Retracement Lines

I realize this is a lot of lines, a lot of technical mumbo jumbo, and it all can be confusing. The charts might, however, come in handy if the friday afternoon pullback on May 31 2013 gathers some steam. In that event, you perhaps will return to look at these charts again.