Monday, September 7, 2009

Technical Update 34.09

I hope everyone is refreshed from their long-weekends. The coming week is likely to be one of high importance in determining if the recent peak at 1039 was in fact a lasting market top or just a speed bump.

Last week, I outlined that "the probabilities have materially shifted in favour of a lasting market top." Tuesday's market action provided further confirmation to this, registering a 90% down day. The remainder of the week was characterized by very low volume, declining volatility and moderately higher prices, achieving a 50% retracement of the down move. I am skeptical of the legitimacy of the move as it was on such low volume going into a holiday. However, price is the final arbiter.

In Elliott terms, this looks to be a 2nd wave of some degree, which means that it can retrace all the way back to the high - but no further. Any push past the August 28th high would be very bullish and suggestive of a price target in the 1100 area. But since market action is likely to be of very high volume from Tuesday onward, any push higher that proves it can hold will be enough to turn me more bullish for a trade.

Below is an hourly chart of the last month for the S&P 500. The horizontal lines are common fibonacci retracement levels for wave 2 moves.

98 NYSE issues managed to make new 52week highs on Friday. Along with a fairly solid closing TICKS reading and strong breadth, this throws a bit of a wrench in the plans for a bear raid.

The big story of the week was the sharp move higher in gold, busting out of a triangle pattern and challenging the $1000 mark once again. Readers will find it interesting that gold managed to do this both with higher US Treasury prices and without much of a move in the US Dollar. The internet is filled with theories as to "why" this is happening and "what gold knows" that other asset classes apparently don't. I think Dennis Gartman put it best in an interview I saw with him last week sometime, when he said (paraphrased) 'Gold isn't moving in reaction to anything. It's just moving. It is a market unto itself and right now it looks like it wants to go higher.' That is a simplicity I can agree with.

The aforementioned US Dollar Index appears to have failed in its breakout attempt and looks destined to make new YTD lows before putting in a bottom. This is obviously important to the direction of equities, so it bears keeping in mind.

That's all for now.

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R. said...

Hey Matt, as always, thanks for the update.

Roger J said...

"The aforementioned US Dollar Index appears to have failed in its breakout attempt and looks destined to make new YTD lows before putting in a bottom."

Well, hot hands there, Matt. USD just dropped dead today (YTD new low already!) and accordingly, futures soar.

But it feels more and more that there are huge cross-currents between overwhelmingly bullish vs. undeniably bearish signals. To mention some:

1. Bullish signals: USD collapsing, futures breaking over resistances like a hot knife on butter, Asian markets hugely up, China up, general commodities up (although only moderately), some momentum indicators showing bullishness on minute-charts. I believe there are many more to be added here.

2. Bearish signals: Treasuries firm, mega-bearish divergences on daily charts across various momentum indicators, XLF & BKX not confirming bullishness (possible bear flag), very thin volumes on up days, above avg volumes on down days.

I guess these cross-currents are the most dominant reasons why it's extremely difficult to pick tops/bottoms -- with tops being the more difficult. These things can be in play across wide ranges of asset classes & SPX points. It involves great pains for both the bulls & bears (with now the bears getting cornered).

Well, this week is supposed to be the judgment week -- whether P2 top is in or not, yes?

Matt Stiles said...


Those are the opposing forces I'm watching battle it out. Gold selling off now, but I've covered a few of my puts out of discipline. I'll wait for a break below last week's lows before getting aggressive on the bear side. And above 1039 before turning bullish.

I may have made things sound a little too binary in the update. I don't like giving hard timeframes on events happening. There's no reason we can't trade in a range for a while between 980 and 1040 before a direction is chosen.

I am still skeptical of the big move coming in the fall as many seem to expect. Perhaps those with September and October option paper need to be pushed aside before anything significant happens. Some sideways-down action would do the job.

For this sort of reason, I only deal in option paper with 6 month timeframes minimum - and usually more than 12.

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