Sunday, June 21, 2009

Technical update 23.09

The major market averages closed the week near the same level they did 7 weeks ago. The fairly strong downside reaction from overhead resistance and through the first level of support (but not closing below) suggests that the first major correction of the post-March advance is underway. Depending on the nature of decline, we should be able to tell with reasonable accuracy whether this decline is suggestive of continuation below, likely far below the March lows, or if it is corrective, suggesting one last move above the June highs, with a potential target of 1100.

We are now embarking on what are typically slow summer months in terms of volume - a trend that has been completely ignored over the past 3 summers, with sharp selloffs in June/July '06 August '07 and July '08. Of course, what seemed to be "sharp" at the time hardly looks that way in comparison with the selloff in late '08. Nevertheless, seasonality has been a very prevalent factor over the past few years. Whether that means we're "due" for a headfake and summer long rally, I don't know. But after the roller coaster of the past year, I can easily imagine money managers flattening their exposure to spend some time with their families. As we approach quarter end, I think that dynamic can take hold as in past years.

Regular readers know that I use Exponential Moving Averages as a means for providing context to price, which are exponentially weighted toward recent price movements, while most market analysts use Simple Moving Averages, which are unweighted averages of the whole period. It is important to point out that for those using the simple moving averages, one must pay attention to numbers that will be "falling off" the back end. Currently, the 200 day simple MA is starting to "lose" its readings of the pre Sept/Oct crash, meaning that the average should start falling like a stone. Many trading algorithms use distance from moving averages as buy/sell signals, so this could be something to keep an eye one. I've included a daily chart showing the difference between the 200 day simple (green) and the 200 day exponential (red) averages.

While volatility has fallen to where I had earlier targeted (high 20's) as a probable nadir, it bears mentioning that it has occurred sooner than I would have liked. The times between June and July expiries are statistically the lowest readings for volatility. For those thinking of purchasing autumn options, be aware that the volatility premiums can be considerably zapped from even these levels. Then again, front month volatility is not always a good indicator for distant premiums. This is illustrated well in the gap between the $VIX (front month) and the $VXV (3 month forward). Back in Oct/Nov the VXV was projecting more normalized volatility (lower) through the new year. It is now projecting higher volatility for September than the front month.

Consistent with my forecast for lower equities, I see USD strength relative to the Euro and other paper currencies. As long as the dollar index remains above last weeks lows (79.19), I consider the trend to be up. Otherwise, we would be looking at a further drop to ~76 before finding a lasting bottom to the countertrend move.

I am still waiting for Gold to make its visit with the October lows. Seasonality is still unfavourable for another couple of months. Hopefully we see a window of opportunity to purchase in late summer.

That's all for now.

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Occdude said...

Thanx for the analysis.

Well have to hand it to you, your one of the few technicians that think gold is gonna test the lows. Most folks see an inverted head and shoulders chart pattern and talk about how gold is gonna vaporize the 1000 mark. I don't see that. Gold is acting far too meekly as it approaches that key 1000 mark although I'm open to changing my mind if it can do it convincingly. I'm more moderate short to intermediatly. I think AU goes down to the neck line and then we'll see if it holds, if it doesn't then I'm with you.

Matt Stiles said...


The head and shoulders looks pretty obvious. Which reminds me of one of the most useful market adages out there:

"If it's obvious; it's obviously wrong." - Joe Granville


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