Every time I roll out the Purple Crayon to talk charts I get comments letting me know that markets are driven purely by fundamentals. Mean-spirited words such as "voo-doo" and "garbage" are used to dismiss technical analysis. The vehemence always strikes me as odd given that charts are an easy starting point for analyzing any security, not to mention the primary tool for many if not most traders, particularly those involved with commodities.
I have nothing mean to say to or about pure fundamental players. I look at the fundies and see giant purple targets on their foreheads. Only people begging me to take their money trade without knowing where we are on the charts.
With the fundamental economic news-flow deafening at best and horrifying at worst, now is a perfect time to back up and take a look at the technical picture. This time I'm bringing support in the person of Peter Lee, Chief Technical Analyst for USB. From what Lee sees in the charts, the market is on its way back to the oft-visited and discussed 1,250 level. The S&P500 closed 2010 at 1,256, bottomed at 1,249 on March 16 and touched 1,258 at the June 16 low. Lee says he "expects bulls to defend that level" with buy orders creating supportive demand for stocks.
The bulls better defend 1,250 because a close meaningfully lower triggers stop-loss orders resulting in a "very fast drop down to 1,120- 1,150," says Lee. For those who haven't lived through them before, very fast drops of 100pts in the S&P 500 can lead to some extremely bad investment decisions.
With what Lee characterizes as a very, very frustrating tape, institutions and individuals are getting long consumer staples and dividend-paying utilities, classic defensive plays in a frustrating tape. What are your other options? Not so fast. Check out the charts on the sectors and overall markets first, we'll have Lee's observations on the metals and crude coming soon.
- technical analysis
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