5/21 Morningline: Stocks and Bonds

Blue-chip stocks have gapped down again at the open and are trading below Thursday's close, but are rising intra-day. This is options expiration day, which generally imparts at least a slight upward spin to the markets. Today -- all bets are off.

	trend	adx	psar	pps	macd	macd trend	sto	sto trend
SPY $107.03
VIX 44.55
TLT $98.53

At 9:58 a.m. Eastern

Treasury long-term bonds are trading higher with a rather striking downward bias intra-day.

On the jump, I'll be discussing today's signals, but also taking a decades long view to try to understand just how ugly it can really get. (Sneak Preview: Pretty ugly.)

The exchange-traded fund that racks the S&P 500, SPY, is showing bear phase on the parabolic sar, bringing the signal into line with Person's Proprietary Signal for the first in five days.

The psar was broken by the May 6 "flash panic" that brought the Dow Jones Industrial Average down 1,000 points intra-day in a span of less than 15 minutes. Today's bear phase might indicate that time has repaired the psar, or it might be the Borg Effect: The declines of the past six days overwhelm everything; resistance is futile.

Looking at the Fibonacci retracement grid:

SPY peaked on Oct. 12, 2007 at $157.52, and then fell to $67.10 on Aug. 11, 2008. Since then the price has retraced nearly 61.8% of that decline, peaking at $122.12 on April 26 of this year. The fall from that level has brought the price a little bit more than halfway down toward the 38.2% retracement level, the next significant level in Fibonacci analysis.

The 38.2% level is at $101.64, suggesting that the price has about $7 more to fall on SPY. However, the Feb. 5 low of $104.58 and the Nov. 2 low of $103.08 are both significant resistance levels.

How ugly can it really get? SPY since 1997 has been tracing a very large sideways pattern, with a peak in March 2000 of $155.75, a low in Oct. 2002 of $77.07, the high of $157.52 in Oct. 2007, the low of $67.10 in August 2008 and then the retracement and pullback.

There is no reason, in term of price patterns, why SPY shouldn't move down to below $80, and possibly below $70. On the other hand, a good case can be made that the price must first test the $150+ level before again retesting those lows.

To see the chart, go to www.bigcharts.com, and create a weekly all-data chart for SPY.

Indicator Exchange-Traded Fund Symbols:
EEM - emerging markets
EUR/USD - euro/dollar currency pair
GLD - gold
JNK - high-yield corporate bonds
SPY - blue-chip stocks
TLT - Treasury long-term bonds
USD/JPY - dollar/yen currency pair
USO - crude oil
VIX - fear index

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The Investor's Guide to Active Asset Allocation: Using Technical Analysis and ETFs to Trade the Markets

Martin Pring's detailed deconstruction of the economic cycle: What sorts stocks to look for at each stage of the recovery. A masterful analysis.

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Abbreviations:
psar - Parabolic Stop and Reverse
adx - Average Directional Index
pps - Person's Proprietary Signal
ma20 - 20-day moving average
macd - Moving Average Convergence-Divergence
mfi - Money Flow Index
sto - Fast Stochastic

About the glance: The colors indicate the state of each signal.

• trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
• adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
• psar, pps, macd: green for bull mode, red for bear
• sto: green for overbought, red for oversold, yellow for the neutral zone.

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