Warning Signs of Upside Ending


Friday's session established a new high for the S&P 500 (SPX)...but the new high has been followed by a plunge of nearly 20 points, which has wiped out nearly all the gains for the week and leaves the SPX in a very vulnerable position heading into next week.

My work argues for additional weakness that presses the index into the area of the October 2005 trendline and the 10-week moving average, both in the vicinity of 1288. This must contain the damage to avert a more damaging corrective period.

Moving over to Nasdaq, the BIG picture of the Qs shows Friday's new recovery high followed by a powerful decline that is on the verge of putting in a downside reversal spike. This is a warning sign that "something" has ended on the upside.

From an intermediate-term perspective, though, the overall Q pattern could be setting up a major double-top formation from the 1/11/06 high at 43.31 and Friday's high at 43.05. Further weakness that breaks and sustains below 41.80 will provide us with additional evidence of the double-top formation.

For now let's see if the Qs manage to hold their prior upside breakout plateau at 42.

Friday's ugly action was very much about interest rates... whether we like it or not... reminding me that it has been a very long time since the equity markets have had to deal with competition from the bond market. Let's take a look at my updated BIG picture look at the TLT's (Ishares Lehman 20 yr bond ETF).

The TLT's continue to press lower despite what was an oversold condition several sessions ago (which is a lesson to us all about taking action sometimes based solely on overbought-oversold readings).

Back on April 3, under 86.30, we suggested short-term traders cover short positions ahead of a bounce but that intermediate-term traders should stay the course to participate in the larger decline towards my 82 target zone. We never did see a bounce to re-establish short-term short positions. However, the TLT's continue their relentless plunge off of a massive 1 1/2-year top formation.

As of this moment, I don't see much in the way of any strength prior to further weakness into my next optimal target of 84.50/30. Only a powerful rally that hurdles and sustains above 87.15 will begin to neutralize my still bearish outlook.

Mike Paulenoff is author of MPTrader.com (www.mptrader.com), a real-time diary of his technical analysis on equity markets, futures, metals, currencies and Treasuries.

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