Is the S&P 500 Serving Turtle Soup?

Are we seeing a classic set-up developing in the S&P 500 right before our eyes?

The set-up I'm talking about is Larry Connors' Turtle Soup set-up, one of the great reversal spotting techniques. It is particularly popular with futures traders and you'll find some discussion about Turtle Soup and its variation, Turtle Soup Plus One at TradingMarkets.com under the futures section. But traders trading in a variety of markets have used and adopted Turtle Soup with great success--from futures to stocks to forex.

Turtle Soup takes advantage of the temptation to buy breakouts and sell breakdowns before there is follow-through in that direction. When markets make a low, bounce, move sideways and then make a lower low, there is a tendency to believe that the market will continuing moving lower. And many times it does. But there are plenty of times when such a market might actually put in a short-term low and begin moving higher. In that kind of market, those who bet that the market would continue moving down need to reverse or get out of their positions, adding more fuel to the reversal.

Whether or not the reversal is short-term or representing a longer-term low, the opportunity that is often presented can be a very profitable one for traders--and potentially a telling one for longer-term traders and active investors.

According to the recipe for Turtle Soup, the lows in the S&P 500 in late January and mid-March "missed it by that much". A Turtle Soup buy signal calls for buying the market at the low of the initial 20-day (or more) low, once that low is exceeded at least four days later. In other words, the S&P 500 made a low on January 23 that was exceeded by the low on March 17. The Turtle Soup method would say that there is a buying opportunity in the days after March 17 should prices hit the same level as the January 23 low.

That didn't happen. Instead, the market opened on March 18th several points from the lows of both January 23 and March 17 and, for the next few days, didn't look back. Selling in recent days has brought the market down some from its bounce peak near 1360, but in the context of the S&P 500's 100+ point move higher from mid-March, the selling may still be more a 30-point pullback than the beginning of a larger reversal.

Pullback or reversal? It remains to be seen, of course. But the lesson of set-ups like Turtle Soup is that when markets have an opportunity to make a significant new lower low--and do not do so--it can be a significant, if not terminal, event in the life of that downtrend. At some point in the vast majority of bottoms in markets, a low is made then tested for support by later selling. When that selling cannot drive the market through the previous low, a move higher is very often the result. And the S&P 500 right now is in a position to do just that. However imperfect the S&P's Turtle Soup may be, given the market we have had since October, I suspect there would be few traders and active investors picky enough to send it back.

Stocks in the News

Headlines this week included news--or at least rumors of news--of increased offers from a trio of unsolicited suitors, as well as disappointing news from the technology sector and continuing strong earnings from companies with commodity exposure.

Electronic Arts (ERTS | Quote | Chart | News | PowerRating) extended its offer to Take Two Interactive (TTWO | Quote | Chart | News | PowerRating) after the software company rejected Electronic Arts original unsolicited bid.

Disappointing quarterly sales led to a sharp sell-off in shares of Oracle (ORCL | Quote | Chart | News | PowerRating) this week--even as earnings were in-line with analyst expectations.

Ford {F|F] decided to sell two of its luxury brands--Jaguar and Land Rover--to Tata Motors (TTM | Quote | Chart | News | PowerRating) for $2.3 billion.

Raised guidance for 2008 led to a boost of nearly 10% for shares of Monsanto (MON | Quote | Chart | News | PowerRating) earlier in the week.

Expectations of a higher bid from Microsoft (MSFT | Quote | Chart | News | PowerRating) encouraged Citigroup (C | Quote | Chart | News | PowerRating) to raise Yahoo! (YHOO | Quote | Chart | News | PowerRating) to a "buy" rating, boosting shares of the Internet company.

JP Morgan (JPM | Quote | Chart | News | PowerRating) offered to increase its bid for Bear Stearns (BSC | Quote | Chart | News | PowerRating) from $2 a share to $10 a share at the beginning of the week.

Potentially better news from the retail sector came in the form of better than expected earnings from high-end retailer Tiffany's (TIF | Quote | Chart | News | PowerRating) and sports apparel giant, Nike (NKE | Quote | Chart | News | PowerRating).

What to Look for Next Week

Monday: Chicago PMI
Tuesday: Construction Spending
Wednesday: ADP Employment Report / Factory Orders
Thursday: Jobless Claims / Money Supply
Friday: Nonfarm Payrolls / Unemployment Rate

Best Performing Stocks (PR 8-10) of the Last Five Days

Here are some of the best performing, high Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 9 or 10.

Plains All American Pipeline (PAA@PAA | Quote | Chart | News | PowerRating). Long Term PowerRatings 10
Navteq (NVT@NVT | Quote | Chart | News | PowerRating). Long Term PowerRatings 10
SPDR S&P 500 Biotech ETF (XBI@XBI | Quote | Chart | News | PowerRating). Long Term PowerRatings 10
Merck (MRK@MRK | Quote | Chart | News | PowerRating). Long Term PowerRatings 9
PowerShares DB Agriculture Fund ETF (DBA@DBA | Quote | Chart | News | PowerRating). Long Term PowerRatings 9

Worst Performing Stocks (PR 1-3) of the Last Five Days

Here are some of the worst performing, low Long Term PowerRatings stocks of the past five days. This week, all of the listed stocks have PowerRatings of 2 or 1.

Fannie Mae (FNM@FNM | Quote | Chart | News | PowerRating). Long Term PowerRatings 2
Merrill Lynch (MER@MER | Quote | Chart | News | PowerRating). Long Term PowerRatings 2
Washington Mutual (WM@WM | Quote | Chart | News | PowerRating). Long Term PowerRatings 2
UltraShort Basic Materials ProShares (SMN@SMN | Quote | Chart | News | PowerRating). Long Term PowerRatings 1
Lehman Brothers (LEH@LEH | Quote | Chart | News | PowerRating). Long Term PowerRatings 1

David Penn is Senior Editor at PowerRatings.net.