Saturday, May 16, 2009

Technical update 18.09

Note: Coming to you from London today. Posts over the next week will be few and far between. I apologize to readers who may not get prompt responses to comments or e-mails.

The divergences I have been following have proven legitimate and a meaningful decline has resulted. This decline is thus far, and should continue to be, the most meaningful decline we have experienced since the early March lows. The question remains whether the decline will be the start of a new wave lower past the March lows, or whether it will correct the previous advance on way to achieving either a test of last weeks highs (930 S&P) or a push to previously discussed resistance levels of a higher degree.

The character of the decline should give some clues to how this is resolved. Thus far, one will notice the significantly lower volume of the past week despite falling on option expiry. The approximate 5.5% decline in the S&P/NDX from their highs has not seen an acceleration in trading volume. This will be something to watch as we move into the typically quieter summer months.

However, it bears mentioning that a large number of key indices have made significant reversals from their 200 day EMA. This is classic behavior one would expect to see before the prevailing trend reasserts itself. Among the indices making near perfect contact with this line are:

- KBW Bank Index
- Dow Transports
- Russell 2000
- German DAX
- Japan Nikkei
- London FTSE
- XLE (energy ETF)
- XME (mining & metals ETF)

KBW Bank Index

Dow Transports

Of course there are a number of key indices that exceeded their 200 day EMA:

- Nasdaq
- Emerging Markets
- XLY (Retail ETF)

Emerging Markets

And a number which failed to even reach the area, perhaps giving clues to relative underperformance in the days and weeks to come:

- S&P 500
- Dow Industrials
- Dow Utilities
- XLV (health care ETF)
- XLP (consumer staples ETF)
- TSX Venture
- CRB Commodities

S&P 500

Those lists are not complete. However, the overwhelming number of indices to meet or fall short of this moving average, followed by the strong reaction, serves as confirmation to my belief that equities remain in a secular bear market. Of course, this does not disqualify the major averages to push higher from lower or even current levels. In fact, I expect nothing less than a test of the YTD highs at some point before the end of the summer. For the sake of "seeing both sides," I have taken some short exposure via LEAP puts of the S&P. It is only what I would consider to be a 1/3 position of what I would hope to take before the markets ultimately roll over - roughly equalling the odds I give the recent highs to mark the peaks for 2009, and likely many years thereafter. Just sharing my process in hopes it adds to yours...

That's all for now.

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