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!


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

The Bear That Cried Wolf

Bears are getting frustrated. They've been told for months now that "the market appears overbought" and that "technical resistance overhead will prove too tough for a continuation." Only to see price slice through these levels like a hot knife through butter, forcing them to cover their shorts.

I admit to being among the above. Thankfully, I have refrained from making overly bearish bets without the confirmation I need and being disciplined with stop losses. I have also eased the pain by taking some fliers on momentum stocks verging on breakouts. I've heard a number of stories from bears who haven't been so lucky.

The scenario reminds me of the August to October period of '07. Those who had been screaming about the housing bubble and subprime mortgages were proven correct in a mini panic with the market dropping from 1555 to 1370 between mid July and mid August. But the Federal Reserve began cutting interest rates and this was enough to convince nearly everyone that the worst was behind them. The market wound higher over the next two months on extremely light volume - even surpassing its July highs. Divergences were plain to see. Financials were lagging badly. Overall breadth and volume were weak. But most brushed this aside - "mere growing pains," they said.

I hear the same comments today from those who were very cautious in spring and skeptical in the summer. Autumn has come and they are bullish. I notice that my trading account is sporting its largest net long position in a long time - so I am no different. Many other commentators are falling over themselves to make the most bullish short term projections. 1100, 1200, 1350 by year-end. Even the bears, myself included, refuse to suggest that it is impossible. If a 50% rally was possible on very little fundamental improvement, what's another 20 or 30%? I hear "fundamentals don't matter in a market dominated by machine traders." Those who proposed that people "buy low and sell high" are suggesting they again "buy high and sell higher."

The driver behind it all, as I have maintained all along is mood and risk appetite. "Performance anxiety" is a term that explains the phenomenon well for money managers. If they want to be sitting at their desk in January, they better damn well make sure they buy. Anything.

Jeff Cooper of Minyanville writes today:

I just got off the phone from one of the smartest hedge fund managers I know (who went out on his own after a stint with one of the legends in the industry).

Jeff: "What are the folks you respect saying here?"

Hedgie: "Everyone of them who are smart enough to be long are qualifying their position by saying, 'We're long but there is nothing fundamentally that justifies it'"

Jeff: "In other words, they all feel they are skating on thin ice, but it's recreational and they all feel they'll be smart enough to be off the ice if it cracks?"

Hedgie: "Last time I checked, when ice just cracks, there is no warning."

I had thought that the rally would end on a whimper; slowly rolling over and accelerating thereafter. But the unrelenting bullishness of Wall Street is setting up for an epic failure. It is a game of musical chairs. Only instead of dancing to music, Wall Street is having a bonfire with the chairs, dancing naked around it and chanting to the theme song from Mad Money.

There will be no sitting.


Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Technical Update 35.09

Another week of gains for major market averages goes by on low volume as buyers of near-term volatility are punished. With some major divergences in the currency and bond markets, many are left scratching their heads, wondering which way is up. The overnight futures markets are down significantly Sunday night, setting up for a potential heavy week of trading. Triple witching occurs this coming Friday - a quarterly occurrence that typically brings larger than average moves in the days prior.

On May 24th, I wrote:

Ideally, the current rally would last 6 months or longer and do its best job of convincing as many people that the worst is over. Even thought it may sound like that has already occurred, judging by the cheerleading in the MSM, the prevailing opinion is that the recovery, when it arrives later this year, will be weak. I expect a vast majority of the media darlings like Roubini, Krugman, Greenspan and Bernanke to give official claims of an "all clear" as a signal that the bear market is set to resume. Call me a cynic>.
The 6 month rally has occurred and the optimistic tone from many prominent figures is easily noticeable. The OECD recently announced that the global recession is over. Tonight, president Obama will make a victory speech on the economic recovery. And Ben Bernanke, along with a chorus of other economists, is busy congratulating himself in "saving the world." Go figure.

I continue to monitor the relentless bullishness of Wall Street in contrast with the sticky pessimism of Main Street. And while it could be claimed in the early months of the rally that the former should lead the latter, doubts will start to percolate after 6 months and only marginal improvement in the general economy. Any precipitous decline in the stock market runs the risk of quickly accelerating to the downside as the "here we go again" mentality causes a run for the exits. I see this potential when reading between the lines of market pundits and analysts interviewed on TV. They are almost always focused on the possible next 10 or 20%. All of their prognostications are dependent on "fundamental economic improvement." As soon as any early signs of this not happening are sensed, their valuation models will completely disintegrate - panic will result.

The move from early August has been very weak. The RSI continues to diverge as do most other momentum indicators. Increased caution is warranted.



While the Dow Industrials and Transports have confirmed each other's recent higher highs, the Dow Utilities have refrained from a similar indulgence. Utilities are a key sector in my opinion due to their extremely high levels of debt. The ability to refinance (or lack thereof) may be a factor in its recent underperformance.



The market for US Treasuries has been very strong of late, even amid regular auctions (increasing supply). Demand, however, appears insatiable as prices march higher sending yields lower. The long bond usually moves in negative correlation with the equity market. While they can always trade on their own courses for a time, the sheer amount of capital required to sop up the extra supply in both equities and bonds will likely result in only one winner. At some point in the future, I can see longer dated treasuries become more of a "risk asset." But I don't think we are there yet.



The recent movements in the Japanese Yen should have readers very concerned. Could the new Japanese government be pondering a liquidationist mantra? I admit to having no edge on the Japanese endgame. Clearly, they are 20 years ahead of the west in the collapse of their debt bubble. But I am sure the Japanese carry trade is alive and well. And I would not be quick to dismiss the possibility of enormous liquidations of foreign assets by Japanese investment banks and hedge funds. Below is the Yen in comparison to the Euro. This has proven to be a quite useful measure of risk appetite.



Have a great week!

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.