Sunday, May 24, 2009

Technical Update 19.09

The S&P 500 was again turned back from the 920-930 level and finished the week near its lows, but marginally positive on the week. Market internals continued to deteriorate from their extreme overbought levels. Volume continued to be weak, although heading into a holiday weekend probably had a hand in that.

My continued interpretation is that this is a pullback amid a longer bear market rally. The character of the decline thus far has not given the signals one would expect if it were intending to breach the March lows. However, as we are in a protracted bear market of secular nature, surprises can come to the downside. The resurgence of positive sentiment could be abruptly halted at any time as a result of any of the numerous catalysts this blog often focuses on.

I am watching support levels bunched in the 860s and 830s. If I can see a low risk entry at those levels, I may consider exchanging the small short position I am currently carrying for some select longs. Otherwise, I will continue with the basic theme I have employed for a few months now, which is "hands off." Any long positions taken will be with very tight defined risk.

Ideally, the current rally would last 6 months or longer and do its best job of convincing as many people that the worst is over. Even thought it may sound like that has already occurred, judging by the cheerleading in the MSM, the prevailing opinion is that the recovery, when it arrives later this year, will be weak. I expect a vast majority of the media darlings like Roubini, Krugman, Greenspan and Bernanke to give official claims of an "all clear" as a signal that the bear market is set to resume. Call me a cynic.

If we do see a decline in the major averages over the next few days or weeks, I will be watching a few indicators to give me hints that could provide some buy signals. One of those indicators is the VIX (Volatility Index). Volatility collapsed early this week, before recovering over the last few days. A continuation up to the 38-40 area would tell me that a little bit of fear had returned to the marketplace.

I will also be watching the Advance/Decline Ratio. If it manages to work its way down to the lower bound of the range, a buying opportunity could be at hand.

Crude oil is chugging along on its way to the $65-75 area I mentioned previously. However, the daily chart couldn't be a more perfect example of an Elliott Wave "5", which has also brought it in contact with its 200day EMA. This could be a top for crude.

I've been dead wrong over the last month regarding the "inflation trade." The Dollar has broken below levels I though it would hold, and the precious metals have refused to provide the kind of buying opportunity I was hoping this summer would yield. That said, the seasonal lull for the precious metals has only just begun. The charts look fantastic, and the fundamentals for the yellow metal have never been better. But consider this: Amid all the events of the last year. All of the major bankruptcies and "money printing" by the Fed. The stock market crashing. The Chinese making threats. Nearly everything a gold bug could conceive of as bullish for gold has happened in the last year. Yet gold has gone nowhere in 16 months. It is flat. Of course, that is better than nearly anything else. But the perfect storm for gold has still not been enough to satisfy the claims for gold prices in the many thousands of dollars.

I'm maintaining an open mind. If it were to push new highs, I won't be too proud to jump aboard. But I still believe the PMs have a washout low ahead of them in the next year before continuing a multi-decade bull market.

Priced in Euros, gold does not appear to be looking as sexy as it does in dollars. That is, gold's rise is underperforming the Euro's rise over the past few weeks.

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Roger Jarema said...

Hi Matt,

Perhaps the most interesting & ground-shaking market action was last Thursday: when stocks, the dollar & treasuries were going down viciously together. This goes against the norm: USD & treasuries up usually means stocks down -- and vice versa.

This event of course made the hyperinflationists shouted & danced again, i.e. USD hyperinflates, US Treasuries dumped, everything from US discarded.

Indeed, the actions in the US Treasuries, especially the long-term ones are worrying. But then again, this may prove to be one of the best contrarian opportunity of the year.

By the way, this is an interesting clip of the 4 paths USD & US stocks may take.

Fundamentally, I'd vote for US dollar up, treasuries up & stocks down. But I dare not take any positions for that... yet. Seriously, Geithner & Bernanke's recklessness is mind-boggling. We have yet to see those recklessness from the other world CBs. These, coupled w/ the break of USD uptrend, forced me to get out of most USD positions. Since I am still standing by the deflationary thesis... predictably, I now stay w/ the yen & some gold.

Any takes on this issue, Matt? Especially for the treasuries. Is this just another "rally in risk", albeit in a more extreme form?

As for China discussion last time, here's another article from Mish. I think it's one of the most interesting from him on China topic last year.

Matt Stiles said...


I will have a post covering the issue of treasury default sometime later this week.



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