Thursday, February 5, 2009

Technical Update 4.09

The major averages staged a weak 2.5 day rally after last week's "price too high" breakout above 850 (S&P) and subsequent rejection. Yesterday's afternoon decline from a gap and run to 850 was an interesting test. The 20 day EMA has now fallen to that same 850 level, which also happens to be the midpoint of the bollinger band. I think the Wednesday rejection was a telling one. I'm expecting an imminent expansion in volatility and declines in the major averages below November's levels - perhaps substantially so. The Dow has continued to lag behind, refusing to confirm any rally. It has been making mincemeat out of it's psychological 8000 level, closing below it a number of times over the last two weeks. The Nasdaq has been acting better, but with all the major components (Google, Apple, Amazon) already providing their positive earnings, I fail to see a catalyst big enough for the index to lead the others higher.

The price action in commodities are leaving lots to be desired. The repeated inability for oil to gain any upside momentum should be worrisome for energy bulls. I favour a move lower. How much lower, I don't know. But below the previous low should be enough for most to completely throw in the towel and allow for a significant rally. I would consider buying some if we get near a "2 handle." I have a terrible record in predicting energy prices, so take that with a larger grain of salt than usual.

As a function of asset class deflation, I think we will continue to see the US Dollar strengthen against other major currencies. The Canadian Dollar looks particularly vulnerable here. An accelerating collapse in the Mexican Peso could trigger a rush of Mexicans buying physical Dollars. I'm looking for a move to 100 in the USD index. If this is indeed a "Wave 3" in Elliott terms, that could turn out to be conservative.

I've got my eye on Russia right now. The pot appears to be coming to a boil there and both the ruble and the stock market are looking extremely weak. Jim Rogers doesn't even think the country will survive in one piece by the time all is said and done. I tend to agree with him on that. From a generational perspective, the Russians are undoubtedly heading toward their "generational crisis" era (the last one being the Bolshevik Revolution). Mass protests, which are a rare sight in politically paranoid Russia, are stepping up. It is yet another country tumbling toward chaos, and is further along the line than most.

In a completely unrelated anecdotal observation, I went to the local Muenster Saturn (large German electronics department store) to buy a new printer on Saturday. It was completely packed and had lines 20 people deep at the cashier. There was no extreme discounting in effect that I could tell. Affluent Germany seems to be relatively unharmed - so far.


dacian said...


"I would consider buying some if we get near a 2 handle."

Can you be more precise for your target for oil? I'm watching this thing as well, and I want to point that by the end of the "small" recession we had in 2001/2002 oil was at 15$.


Matt Stiles said...

No. I cannot and will not be more precise.

I'm looking at it in Elliott Wave terms, which suggests we are probably toward the end of a wave 4 correction. Wave 5's can complete anywhere from just below the wave 3 low to far below. It depends on the path it takes to get there.

A 2 handle means something in the 20s. If it doesn't get that far and turns around, I won't be afraid to miss out. I don't see it bouncing much higher than $50 thereafter.

Matt Stiles said...
This comment has been removed by the author.
Matt Stiles said...

So much for an imminent move lower and expansion in volatility. "The path of greater frustration" appears to be higher.

Joe said...

Hi Matt,

The bad unemployment data only seemed to give the market confidence that the "stimulus" package will be passed swiftly. Add to that the hope of the next bank "bailout" package to be announced early next week and you get a nice rally. I don't think anyone wants to be short this market right now until after those 2 things come to pass. Maybe there will be some "selling the news" next week.

It's interesting that crude fell today, apparently behaving to the bad jobs data as expected. Perhaps this gives weight to the idea that most of the market rally today was just a short squeeze. I think if your prediction of negative GDP for China comes true then we will definitely see crude in the 20s.


Matt Stiles said...

Hi Joe,

I try not to read too much into the correlation between the news and the reaction of the market.

Yes. The job number was horrible. But because the market went up, the media spins it as something else (ie. "confidence that the stimulus package will be passed swiftly.") If the market went down, it would have been because of the horrible jobs number. The media spins the news after the fact to convince you of their relevance.

In reality, they have no idea exactly why markets move up and down - and neither do we. Price is determined by individual actors who have numerous different time preferences. All this little rally tells us is that optimism is higher than it was on Wednesday. Nothing more.


View My Stats