Monday, September 21, 2009

Technical Update 36.09

Another week of gains on fairly decent volume is continuing the push into the upper boundary of resistance cited in my May 10th technical update. I noted S&P 1075 as a potential level of resistance as it marked the "point of recognition" back in September of '08. 1075 was a very obvious level of support at the time as it marked a number of long-term moving averages and trendlines. The S&P closed the previous week around 1100 and gapped lower the following Monday to about 1060. Price has only returned to fill that gap now, a year later. I find that gap fills are particularly useful targets when used in conjunction with the Elliott Wave rule of price returning to the wave (4) of 3 of a lower degree - which has already been achieved on the S&P, while the Dow appears to be satisfying both targets at the moment. If price were to reverse from these levels, I would have more conviction that the Elliott Wave consensus of a Primary Wave 2 is the correct marking for this rally - which would be disastrous for stocks over the next 2 years.

Today, I will show 3 separate time frames of the S&P, as I think it is important that readers see how using the separate intervals can also increase one's conviction if they are to all align nicely in forming a hypothesis. The first chart below is of the daily. One can see that the 200 day moving average (green line) may not prove useful in terms of forming a price target. Price often slices through this line. However, it can prove useful if used another way. One can calculate the distance from the moving average and use that as an oscillator. The further away from the line, the more "pull" it should exert on bringing price back within its grasp. Back in March, we were at historic distances from this line. Today, we stand 20% above the line. (note: I typically use exponential moving averages, but for the purposes of this indicator, I've used the simple MA).



Next chart is of the weekly timeframe. In using moving averages, it is important to note that certain averages tend to be more "in play" than others. If price has often reacted from a certain average in the past, it is more likely to do so in the future. If an average acts as support in an uptrend, it will likely act as resistance on an ensuing downtrend. Such is the case with the 100 week EMA. Going back nearly a decade, we can see numerous instances of fairly major intermediate tops or bottoms occurring from this line. See the pink line below. We have returned to that line as of 1075. If it acts as resistance here again, I would have high confidence that a major top was in.



Lastly, we will look at the monthly chart. One can see how the RSI on this chart was at historic oversold readings. It has now recovered to the midpoint, which typically serves as resistance in a secular bear market as it does support in a secular bull. However, so long as it resides under 60, we can say that the bear lives on - which could give it considerable upside should it choose to drag on for another 2 months or so. Additionally, notice how the current level has acted as support and resistance numerous times over the past 12 years. 1075 appears to be somewhat of a bear market pivot if the bear is looked at to have begun at the 2000 top.



That's all for now!


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8 comments:

Willy2 said...

I want to chime in on the topic of the discussion of Inflation vs. Deflation.

My opinion is this: As long as the FED (or the ECB, BoE, BoJ, RBA or BoC) are printing money at a SMALLER rate than the destruction of credit(/money) (hyper-)inflation doesn't stand a chance to rear its ugly head.

Everyone who is pointing to Zimbabwe is overlooking one crucial point: it took Zimbabwe EIGHT years to create hyperinflation, EIGHT years to wipe out/overwhelm the amount of outstanding credit. And that overwhelming of the outstanding credit lead IMO - in the long run - to Hyper-inflation.

Matt Stiles said...

Willy,

Yes. It is credit marked to market that is of primary importance. Unrealized credit losses are just as deflationary as realized ones.

Zimbabwe had almost no credit creation mechanism. They were strictly a fiat paper currency system. Under this situation it is possible (even inevitable) that hyperinflation will result from monetary printing. In the West, we have credit based currencies. The amount of paper is a fraction of credit outstanding. And it becomes ridiculously small if derivatives (and other cash equivalents) are also considered.

If someone starts talking Zimbabwe analogies with the west, I stop listening.

Roger J said...

Matt,

Guess who's the latest addition to the bull bandwagon. None less than MARC FABER. This is just the wildest bear turned bull occurence I can think of -- doesn't mean that it can't go crazier, though.

Talk about sentiments at extremes there... USD bulls right now only stands at 3%. Might have to go to 0.5% to reverse? LOL.

http://finance.yahoo.com/tech-ticker/article/338419/Buy-Stocks-Because-U.S.-Dollars-Will-Be-%22Worthless%22-Says-Faber?tickers=fcx,gld,nem,chk,ng,xom,pfe

Matt Stiles said...

Faber, Grant and Bernstein have all turned bullish this week.

Various other bloggers and bearish newsletter writers I know have seen massive declines in readers and subscriptions of late. It's almost as if they don't have a choice.

It reminds me of something I was told as I first got involved in the markets years ago: "Being bearish is a bad career move."

Ironically, that guy is no longer working in the industry.

Willy2 said...

I think there's another danger for the e.g. FED. In the US the FED monetized debt (toxic assets) in order to keep the economy afloat. But isn't the FED by doing so in danger of blowing up as well ? Sooner or later the FED will have to mark to market those toxic assets as well or IMO face a confidence crisis. And in both cases that - IMO - will lead to a collapse of the USD. (Presuming other countries will do better than the US).

On the topic Bears v.s Bulls: Bob Hoye made some very interesting comments. He thinks that when the EUR/USD or XEU goes down then the bulls are in trouble.
Source: www.Howestreet.com (Audioclip)

When I look at this graph there hasn't been a capitulation by investors yet but the graph suggests markets are extremely overbought. Take a good look at the graph ! Source: http://dshort.com.

Mike said...

I've always followed the markets but didn't start following them on a daily basis until August 2007, and feel like I don't know how to be bullish (except for gold) given how my early time period was influenced by the complete unraveling of the financial system. While I became less bearish last winter, I never turned bullish and have been superbearish since early June.

I find it very scary for the future of our country that a small group of financiers and politicians can have so much influence over the fate of our economy, and ultimately the future of our entire country.

Roger J said...

LOL. With those guys turning bullish, is there anyone bearish left that still has some access to popular media? In the blogosphere, there are still quite a number of them although they are losing popularity quickly. I noticed some excellent TA blogs are getting much less correspondence, some examples are Kenny's & Daneric's.

Hugh Hendry hasn't got any interview since July, I think. Who else is left? Gary Shilling, maybe... but he's lost popularity since long ago and he's a permabear anyways.

It just feels all of these is setting up for a humongous blow up. In previous crashes, there was huge dislocation between currency, commodity, treasury & stock markets. Right now, the main dislocation is in the treasuries. It's strong despite the rally in other risk assets.

It's been very painful for the bears, while their stance is logical. I can imagine how much more painful it will be for the bulls when all this thing ends.

Roger J said...

willy2,

regarding USD, I think if you follow this argument, it will be easy to come to the conclusion that it should rally.

1. US monetary system is credit-based, as Matt explained above. If the Fed ever tries anything too funny, the credit market is going to crash. Effectively a suicide for the Fed. Japan can be referred to as an example. Hyperinflation? It will make no sense to have banks in such a condition (what's the point of saving money deposits?) If it's up to the Fed (it's NOT, but let's assume so), they will choose deflation over hyperinflation. Hyperinflation = death for all banks & the Fed itself.

2. everyone and their mother is short the dollar (by being drowned in an ocean of debt -- for risky ventures). at some point, the society as a whole comes to a point of recognition that those debts are not going to be feasible to be serviced. there just isn't enough productivity to service those debts. what comes next is this huge margin call -- everyone scrambling for dollars to repay debt.


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