Saturday, July 4, 2009

Technical Update 25.09

The major North American markets experienced the expected holiday inspired low volume and whippy trading. However, the 3% US market selloff on Thursday should be looked at skeptically as it was a particularly low volume day. Followthrough early next week is required to confirm its legitimacy. Either that or the rally that preceded it should be looked at skeptically as fund managers positioned themselves for quarter end accounting. It's difficult to say in a market without volume. In the eye of the beholder I suppose.

My eyes are fixated on two markets in particular that are underperforming: European equities and Commodities. Any acceleration to the downside in either of these markets should be enough to drag the others down with them. Combined with the seasonal weakness patterns in stocks, my expectation remains for a protracted selloff in the coming weeks and months. Whether this selloff morphs into full-fledged panic and new lows will likely remain very difficult to predict.

Do notice in the charts below how many of the moving averages (20,50,100,200) are bunched up tightly. This is a characteristic that typically precedes sharp moves in one direction.

I posted a chart of the German DAX last week. Here is a chart of the London FTSE. There were obviously no holidays in Europe this week, so Friday's trading saw an attempted recovery rally, but a close at weekly lows. That is not a positive sign.

Market internals have continued to deteriorate. While the major indices tried to stage a rally early last week, it was done on very poor breadth, meaning the rallies were led by only a few stocks overall. Below are the percentage of stocks above their 50 day MA and the 50day moving average of the advance/decline ratio. Both show continuing weakness.

I would also keep in mind the credit markets as a potential "tell" in the days ahead. Particularly important are high yield corporate bonds, which is where funding will likely dry up first.

Energy stocks are leading the way down as commodity markets of all types show weakness. I'll repeat what I asked last week: "What hope for green shoots remain if commodities roll over?"

I'm thankful to have reinitiated my Canadian Dollar short side exposure near the top. It has been the weakest major currency for the last few weeks. Look out below if the euro and pound confirm the loonie's lead. My forecast remains for the CDN/USD to trade with a "6" handle sometime in '09. If that forecast is to be correct, any bounce in the loonie should be short and weak. A substantial break back above the 20day EMA (blue line) would likely be enough for me to back off.

Silver is showing some relative weakness to gold, which is a good barometer for risk. Being primarily an industrial metal and secondarily a precious metal, silver should show weakness if the economy is to continue down the path of lesser resistance.

Have a great week!

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1 comment:

Dacian said...

Hi Matt,

thanks for this new post.

Regarding european equities, it always it amuses me to watch european indices vs. US indices (and especially the broad S&P 500 index). While doing this, my feeling is that european operators have no opinion on what to do. Europe doesn't matter, so it's not european markets which will drag down global markets; Europe just follows blindly, with no opinion whatsoever on the situation, the US main markets.

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