Sunday, June 7, 2009

Technical Update 21.09

The market's "gap and crap" performance on Friday morning has the potential to mark a turning point. Failing to rally on "good" news was one of the characteristics I was looking for two weeks ago in More On Social Mood. The headline payroll data came in way better than expected and the market shot higher immediately following the news. Bloomberg ran the following headline: "US stock futures surge as employers cut fewer jobs than forecast." Unfortunately, something strange happened in the hours following. The market tanked. Falling from a pre-market high of 957.5 to 932.5 2 hours later.

This is not something that has happened since the rally began in early March. Good news was bought. So was bad news. Because it was "less bad" than expected. This goes to show once again that it is not the news that matters, but rather the reaction to it that counts. The same Bloomberg article had changed its title by the end of the day to, "Most US stocks fall on interest rate concern." Rates were lower than they were in the morning.

I am more confident that a top of some significance has been put in. The nature of the ensuing decline should be of interest to determine whether Friday marked "the" top. I am looking at a number of possibilities:

a) Friday marked a significant high to be retested later this summer after a large selloff
b) Friday marked "the" high, we proceed to new lows
c) Friday was only a speed bump on the way to S&P 975-1000, where a meaningful reversal takes place
d) There are obviously many other possibilities but I don't feel that they are of a high enough probability to warrant consideration

Taking a look at some of the various indices and asset classes we are seeing some important negative divergences, while heavy resistance resides above.

First is the S&P 500, now having rallied 42.9% in 13 weeks. Notice the negative divergences in volume and the RSI, while it struggles to gain the 200 day EMA. (Note: many analysts have claimed that the S&P has surpassed the 200 day. This is true for those using the "simple" moving average. I use exponential moving averages. Neither are better than the other. It is only important that one uses the same method consistently).

The Dow Transports are also putting in a non-confirmation after the Industrials surpassed the early May highs early this week. For those following Dow Theory this is a problem. Also note that it too is struggling to surpass the 200 day EMA.

The Dow Utilities are still phenomenally weak. After being sold off as aggressively as everything else (falling 48% from their highs), the sector has been the weakest on the rebound. The market is clearly sensing their vulnerability in that they are saddled with debt and will likely need to cut their dividends in order to raise capital.

The market's internals are still in overbought territory, which doesn't mean anything on its own, but combined with the above factors, one knows that the odds are not good for a continuation. At least not in any explosive manner.

Below is the percentage of NYSE stocks above their 50 day moving averages. Note that fewer stocks displayed this characteristic on last week's push as did in early May. This suggests that leadership is narrowing.

Next is the 10 day moving average of the advance/decline line. Notice how infrequently this indicator goes more than a few months at a time without at least visiting the -400 mark if not lower. The last quarter this did not happen was Q4 2006. Smack-dab in the middle of the "cinderella economy."

Oil has recorded an exact double from its lows last year. It is now in the thick of my resistance zone between 65-75.

I reinitiated my short position on the Canadian Dollar near the highs as I didn't feel comfortable without it. That was a trade I should have taken much earlier, but didn't. The US Dollar appears to have put in a reversal. Sentiment reached a negative extreme. 95% of currency traders were bearish on the Greenback. In Europe I've heard this extreme was even more pronounced, at 99%.

That's all for now.

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spotics said...

Despite the strength of the dollar and weakness of the market, oil held firm for most of the day.

I wonder if oil has legs?

stockaddict said...

Hi Matt,

Check out this article:

Supertankers Storing Oil to Deliver Crude, ICAP Says

It seems to me like this is just an attempt to manipulate the market to reinflate the oil bubble.

What do you think?

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