Sunday, August 16, 2009

Technical Update 31.09

The major averages failed to make any kind of significant pullback in price. Overbought conditions can work themselves off via either time or price - usually, but not always, a combination of both. It appears that the S&P is merely taking its time moving sideways prior to another thrust higher. The shorts appear to be getting frustrated as even bad news (retail sales, consumer confidence, bank failures) is happily bought. The bi-weekly short interest report shows short interest falling in the last two weeks of July, even as the market rallied - consistent with the short squeeze thesis.

As mentioned earlier this week, the markets tend to take "the path of maximum frustration" at major turns. It will be attempted to ensure that as few as possible are allowed to benefit from another leg down in the stock market. And notice how short interest is much lower than it was at this time last year.

It can also be seen that there remains higher levels of short interest in financials and consumer discretionary stocks. I suppose some may be speculating that back to school sales will be poor. A few positive reports on that front could accompany a final blowoff top and yet more short squeezes.

Below are the hourly charts of the S&P and Nasdaq. You can see the underperformance of the Naz, which typically signifies a fractured and unhealthy market. It should be watched closer than usual for signs of what's to come. Also note here the fairly moderate momentum indicators like Stochastics and RSI, while price remains within spitting distance of their respective highs.

Sticking with the Nasdaq theme for a moment, Jeff Cooper of Minyanville had a great chart showing numerous trendline intersections dating back to 2004. Cooper does a lot of very good time and price work in the school of W.D. Gann. He predicts that a topping process is in the works now and that September will prove troublesome.

China should also be watched for signs of rally exhaustion. A continued drop over there would leave North American markets hard pressed to justify many of their recovery-priced-in valuations.

There is support on the Euro around 140 and again at 138. A cluster of moving averages and trendlines hovers in these areas. Should it break, I'd have enough confidence to say the equity rally is over. Until then, I see it possible that we continue higher.

The same could be said for the British Pound and the Canadian Dollar.

That's all for now.

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