Sunday, September 27, 2009

Technical Update 37.09

Readers should focus on potential changes in market character as cited resistance levels (1075) proved too difficult to capture. However, one must avoid becoming too bearish immediately due to the fairly benign nature of the 3 day selloff to date. The tape certainly 'felt' heavy, with sharp thrusts lower being met with almost no interest from dip buyers. There have been a number of similar selloffs along this most recent July-Sept rally, but 3-5 days and around 4% seems to be all that can be mustered. In order for me to have confidence that we have seen an important peak, the selloff needs to continue and accelerate to the downside early this week. Otherwise the recent market action must be considered as nothing more than an overbought 'exhaling' and temporary in nature.

Here are 3 conditions I am looking for to confirm that a top is in place:

1) Consecutive daily declines exceeding 2.5%. Since March, the S&P 500 has not managed to achieve this (if so, only marginally). Thus, any decline that is not immediately bought can be considered a change in market character.

2) Continued bullishness being displayed by the media. Daneric's Blog has noticed that there has been a change in sentiment in the media over the last week. During previous selloffs of the same magnitude, it was quickly jumped on as a sign of a potential top. The media and most pundits seem far more confident this time around. "Nothing to worry about," they claim. If this attitude continues, the denial-migration-panic cycle can take hold where another 'point of recognition' kicks off the next bear leg down.

3) Weaker market internals than previously experienced since the beginning of March. Among them:

The 10 day moving average on the Put/Call ratio should pop up above 1.00 for the first time in many months. This would point to a sustained period of bearish options bets - often associated with impending market declines.

The 10 day moving average of the Advance/Decline ratio should also make new lows for the March-Sept period. Again, this would signal a change in market character as weakening leadership is often a good signal of market tops.

We have the recipe for a major market top. It is now left to collect the ingredients. And it is my feeling that they must show themselves soon, lest the dip buyers are emboldened and the manic attitude sets in again for an assault on new highs. I will be prepared for either outcome.

I am also intently watching the oil market for signs of further weakness. Oil and commodities in general have proven to be a good indicator of risk appetite. Speculative credit flows and risk appetite are the driver behind all asset markets and commodities are no different. Notice that crude has backtested its trendline from the lows and reversed quite hard. Also notice the massive negative divergence on the RSI.

Last but not least, the dollar index is again working on a potential bottom. I would be among the 3% who count themselves as bullish on the US Dollar. Being in such a minority has proven profitable many times over the years. I am confident it will again. I would want to see the index jump above its 50day EMA - something not achieved since April - before confirming a bottom is in place.

Do note, however, that the various components to the dollar index had some wild divergences from normality. The Pound took a drubbing while the Euro hardly budged. And the Yen logged large gains and is approaching its highs from Dec/Jan. When the currency markets speak, equity and commodity investors/speculators would be wise to pay attention.

Have a great week!

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Anonymous said...

There're another bearish signs: James Grant seems to have turned (somewhat) bullish and Martin Weiss recently turned into a inflationist. Thanks to Mish.

Occdude said...

The Yen is rising against the dollar again indicating liquidity flows are changing.

I think one more false signal moves the market higher, high enough so the sideline money hears the whistle to board the "sucker money express".

The media is cautiously optimistic still, so its not as clear cut as I would like to see, although the market definitely looks like it wants to correct and probably will, I just don't think its time. Id also like to see the retail investors piling in again to get that peak frenzy feel.

Id watch to see if we start to see this uniform world side sell off again where everything goes down before Id get short again. Theres a correction maybe 10 percent, then a rise where the market should break DOW 10000 convincingly to get the train whistle blowing and then its gonna be abyss time.

Matt Stiles said...

This morning's rally is not what bears want to see. Internals are very strong even though the dollar is slightly positive.

From an Elliott perspective, it is possible that a minute wave 1 down occurred from Wed-Fri. Today's 5/8 retrace (1065) could be minute wave 2 up. A double top is also a possibility under this scenario. But the strength of this morning makes me doubtful of this as a possibility. More probable now is that the final wave 5 up has begun and will push higher.

It is times like this that strictly following Elliott Waves is frustrating. Two equally probable wave counts concluding opposite outcomes.

Occdude said...

The longer this sideways move lasts, the weaker this rally looks. Stimulus is waning, the season is right, big run up, still more bulls than bears, the dollar is again the red headed step child, time for a little reversal, not armegeddon though.

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