Sunday, April 12, 2009

Technical Update 13.09

I hope all of my readers enjoyed the long weekend. I personally have hardly glanced at the computer for the last few days. It is very easy to get caught up in the 24/7 news flow that is now available to us. Taking a step back is usually more helpful than harmful in my opinion.

Week 5 of this rally proved to be just as interesting as the previous 4. Thursday greeted us with an earnings "surprise" from Wells Fargo that catapulted the index above levels formerly known as resistance. The 835-845 area now becomes heavy support for an extension higher. I would also note that the S&P, with it's late day push, closed the week above the important 20 wk/100 day EMA. It is the first time it has accomplished this feat since May of 08. But in an effort to see both sides, we will also remember that the 860 area was significant support throughout December. Past support becomes future resistance. That said, I don't expect those levels to hold. The 50 wk and 200 day EMAs should act as a magnet during an earnings season that proves to be "better than expected."

I will be keeping my eyes peeled for negative divergences as (if) the markets carry higher. Currently on my radar are the anemic performances in the utilities and health care sectors. The sectors that do not experience significant recoveries relative to their previous '07 highs will be ripe for leading the market lower. Financials and retail may also fit this bill even though their recoveries have been spectacular - they are still shadows of their former selves. I will have more on this in the weeks and months ahead.

I have discussed the debt problems of the utility sector in the past. If the credit markets do not thaw enough for these companies to refinance their debts, the collapse in common equity of these stocks could be spectacular. They would be forced to cut their dividends - and without those, there is little legitimate reason to own pipeline operators, electricity providers or telecoms companies.

When the next leg of this bear market starts, it will be with a bang. I've discussed the possible shoes to drop could be in the form of commercial real estate or pension funds. We all know that even though banks will be showing profits this quarter, those are not indicative whatsoever of what the garbage on and off their balance sheet is really worth. This lack of transparency is yet another worrisome potential catalyst. But we must bear in mind that it is not necessarily the US that will provide the footwear. It could come from Europe or even Asia.

I'm looking at the performance of the Euro very closely here. When the G20 leaders promised $1 Trillion in additional funding to the IMF, one would think that should have been supportive of the Euro. With hundreds of billions in loans being made in Euros to central and eastern countries, the IMF money is supposedly going to help stabilize that region and protect western european banks from defaulting countries in the east. The continued weakness of the Euro in spite of these developments may be signaling something important.

I have also discussed crude oil as being a decent indicator of increasing optimism in the overall economy. I think it has eyes for the $70-75 range highlighted by the bunching of important EMAs in that area. It made the first important step in achieving those targets by closing significantly above the 20.

In my February 28 Technical Update I asked:

Copper is paying no mind to the rapidly declining economy. It is still sitting 24% above it's December lows. Is "Dr. Copper" forecasting a little improvement?

This proved correct as Copper led and is still leading the surge higher. A 50% correction of the '08 crash would bring it to approximately $2.60/lb - right around where a few key EMAs are sitting.

Platinum has been defiant of the general decline in precious metals prices. It has been performing more as the industrial commodity that it is, so I'm not sure if this should be surprising.

That's all for now.

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