Sunday, October 4, 2009

Technical Update 38.09

Another week of losses for the major averages gives heightened probability that a major top has been reached. There remains, however, numerous market anomalies that one would not expect if "a change in market character" is what one is looking for. This could, in fact, be nothing more than an overbought correction much like we saw in July.

In the "failing to confirm" category lies crude oil, which remains sticky after posting a 6% weekly gain. The US Dollar, which only managed a third of a percent gain for the week, may also be hinting at something amiss with the validity of the selloff.

I remain cautiously bearish until those two above factors resolve themselves. But I would warn against complacency for those holding large long positions. When this major downward movement materializes, it will not be merely a "correction" of the March-September bull market. We will be proceeding to substantial new lows as the economy deflates, deleverages and completely retools for future expansion. In all likelihood, the highs we achieve in the next weeks (or have achieved already at 1080) will remain in place for a decade or longer.

Moving back to the shorter term for a moment, I would point to some of the recent failures in the S&P 500. Strong markets display strong price movement into the ends of days and weeks. For two weeks running now, we have seen midweek tops on Wednesday afternoon and continued selling pressure for the remainder of the week. This shows that traders are more reluctant to hold positions over the weekend.

Also note that there were two very noticeable bullish patterns carved out this week, both of which failed. Failed patterns often lead to sharp moves in the opposite direction.

Market internals continue to weaken. Advancing/Declining issues and volume are both on the brink of displaying their weakest readings since March.

Market volatility is also ticking upward and recently displayed a positive divergence with the overall markets, refusing to move significantly lower as the major indices climbed higher in September. Additionally, the VIX has broken a trendline dating back to the October/November '08 peaks. Does this breakout look too obvious?

That's all for now.

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Roger J said...


Regarding oil, on my chartworks, it shows that it is backtesting the most modest trendline drawn from the March lows. This modest uptrend-line was broken the week before @ around 68. Now it is backtesting and can't (or hasn't) really successfully reached the trendline. Failure here could prove very bearish for oil. If you look at $WTIC daily charts, pay attention to RSI 14-period = 50. Now it's hovering around the area.

Furthermore, the commodity currencies are not confirming oil's strength. AUD & CAD look weak in the days oil was strong, even weaker than EUR & GBP. Also, other major commodities are seemingly weak. Look at copper. We'll see how tomorrow unfolds. If oil shows major weakness, I guess it's a good time to add on commy shorts, eh?

EW-wise, I think shorts should consider backing off if SPX is recapturing 1041?

Roger J said...

As for VIX, what we should be careful is that the current level acted as a strong resistance in late 2007 and July 2008 (at around 31-32 levels). This could prove very important as very few ever mention it.

Anonymous said...

According to the FOMC statement the FED is going to slowly reduce the amount of monetization. And that will end in the 1st (?) quarter of this year. And that's NOT a good sign for the markets.

The ratio between the US 10-year future and the LQD (ETF investment grade corporate bonds) has gone up sharply in the last week. No wonder, LQD went above even the all time high in may 2008 and late december 2008 of approx. 97. LQD was last week above 105 !

Matt Stiles said...

Well, the bears had 'em by the balls and briefly let their guard down, only to get hit in the face with a shovel. That'll teach 'em!

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