Archive for September, 2009

Sunday, September 27th, 2009

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 All things considered, this has not been an awful September.  The markets rallied and the bulls were in full control of the market.  The end of the month/quarter portfolio dressing and undressing should help us understand the direction of the market for the month of October.   Remember, most mutual funds will have to take their loses by the end of this month.  The secondary thought might be that because many of the portfolio managers have enjoyed sweet easy gains, it is likely that some of this money will be either hedged or removed from the market.  This paring back of exposure can be seen by the sale, as in covered calls or the purchase of puts for short term insurance, or perhaps a combination of both could be seen in coming days.  We might also see some straight equity sales or might see equity sales paired with the purchase of call options, just to remove the profits from the trade, while keeping a measured exposure to the security.  Many mutual funds because of their investment policy statements can’t do that, but we would guess that if it is allowed, it will be done.  Some funds demand that the portfolio manager stay fully invested and do not allow the PM to hide in cash.  Many of the “to the moon Alice” or “melt up guys” will poo poo us for having the nerve to suggest that some profit insurance trading will be seen.  The other thought we have is:  should the selling begin in earnest, will that selling beget more selling as portfolio managers worry about declines causing some of their gains to vanish.  Wouldn’t a portfolio manager sell rather than to take another hit to his bottom line and won’t that selling cause more selling?  Remember, bonus time is not that far away and if you are being paid a bonus based on your performance, you will guard those profits from disappearing. 

This should be an interesting week.  We have the end of the month, the end of a quarter and the US “Jobs Report” which will be released on Friday morning at 8:30.  Naturally we do not hold much credibility in this report and feel that is grossly misses the extent of the unemployment rate.  We also take issue with this report for not including college graduates who are unable to find jobs.  These poor souls have never been in the job force as full time employees and are not being counted.  Should we actually count this group of under and unemployed, we believe that the number would be closer to 20% than to 10%.  This economy has kept these college graduates home bound with their aging parents who, had visions of less expenditures and more savings.  Now, of course, savings are out of the question and forget retirement.  The current expenses or outlays for their children have been enough to cause tightness in spending and concern for their futures.  Those students who went on to graduates school are building up debt which will have to be repaid.  Things aren’t pretty for job seekers or those who support them. 

Tuesday:  consumer confidence is released at 10:00, S&P /Case-Shiller home prices are released at 9:00, Dallas Fed President Fisher speaks and Philadelphia Fed President Plosser speaks.  Wednesday:  2nd quarter GDP is released at 8:30, September Chicago PMI is released at 9:45, Atlanta Fed President Lockhart speaks and Fed Vice Chairman Kohn speaks about the Fed’s exit policy yikes.  Thursday:  August personal income/consumption is released at 8:30, September ISM is released at 10:00, Challenger Gray & Christmas issue September job cuts, Fed Chairman Bernanke speaks on the “Hill,” Cleveland Fed President Pianalto speaks and Atlanta Fed President Lockhart speaks.  Friday:  September nonfarm payrolls/unemployment rate are released at 8:30.

  

The US Dollar index is trading between 77.335 and 76.00 which is represented by two horizontal lines.  Although the low of the Wednesday trade did not drop to the 76.00 level that line has been a level of support dating back to September of 2008.  Unfortunately, there are more lines below that level, the next level down found at 74.75.  Although this was an up week for the US Dollar index, the US Dollar index remained below the weekly down trend line at 77.43.  The downtrend line for next Friday is at 77.00.  The monthly chart of the US Dollar index looks awful.  If you draw some Fibonacci retracements from the US Dollar index’s low seen on March of 2008 at 70.805 to the recent high of 89.71 seen in March of 2009 you will see that the US Dollar index has broken below the 61.8% level, which certainly isn’t bullish.  That 61.8% level is at 78.015.  Naturally, for the bulls, it will be important for the US Dollar index to close above that level.  We are below the Ichimoko clouds for all time frames.  The 5-day moving average is at 76.681.   The top of the Bollinger band is at 78.815 and the lower edge is seen at 75.70.  The Thomas DeMark Expert indicator is issuing a buy-signal and is approaching overbought levels.  The stochastic indicator, the RSI and our own indicator are all curling over to the downside.  There is a down trend line at 77.652, which, if the US Dollar index can remove, would frighten the bears and shorts into action, buying the index.  Short of that, there is no motivation for a short to cover.  We believe there are too many US Dollar bears and that the trade is heavily weighted to the short side which, generally ends badly for the crowd.  The problem is that this situation can last a long while.  We would advise not doing anything until the trend presents itself. One word of caution is that should we close below 76.00 for two days, we see the next level at 74. 

 

This has been the first week in three that the S&P 500 closed down.  We continue to see signs of exhaustion on the weekly chart.  All the indicators on both the weekly and the daily chart continue to issue a sell-signal.  The 5-day moving average is at 1057.63.  The top of the Bollinger band is at 1084.13 and the lower edge is seen at 991.41.  The market traded below our horizontal line at 1038 in the Friday session but managed to close at 1041.  We are above the Ichimoko clouds for the daily time-frame, but in the clouds for the weekly time-frame and below the clouds for the monthly time-frame.  If you draw an uptrend line from the July low to Friday’s close, you will notice that we closed on that line.  We need to see the market stay above that line.  The good news is that the angle of the decline has been too steep and that we will adjust for that by either going sideways, for a while, or by a rally.  This does not change the landscape of the chart but will be a function of the three day decline that has been seen.  The bearish engulfing / outside day, warned us of this retreat.  It is likely that we will retreat to 1025.50 before the bounce back to the horizontal line of 1038.75.  The market is weary and needs to rest.  The market has held up rather well and could have really taken a beating.  We continue to see the “buy the dips” crowd appear.  There will come a time when, the market slides that this support will be absent.  That will lead us to a flush out from which, the market will again build yet another base. 

 

The NASDAQ 100 looks like both the bulls and the bears were in a fight and both lost.  The candle on the chart is a doji-like candle with an extremely small body.  This is usually seen when the market is in transition.  The 5-day moving average is at 1715.94.  The top of the Bollinger band is at 1676.22 and the lower edge is seen at 1586.16.  All of the indicators that we follow herein continue to issue a sell-signal.  Not one of these indicators is oversold showing us that there is plenty of room to the downside.  The daily chart looks like a rounding top.  We are above the uptrend line and are above the horizontal line which, is at 1680.90.  We are above the Ichimoko clouds on the daily and weekly time-frame and in the clouds for the monthly time-frame.  The weekly indicators are also issuing a sell-signal. We have a good uptrend line at 1660 or so.  As Art Cashin says “stay nimble.” 

 

The Russell 2000 preformed better than the other indices in the Friday session closing down 1.90 on the day.  All the indicators that we follow herein are issuing a continued sell-signal with plenty of room to the downside.  The 5-day moving average is at 610.30.  The top of the Bollinger band is at 633.04 and the lower edge is seen at 549.16.  This market has given up about 38.2% of the September rally in three trading days.  While this is not in itself bearish it reminds us that markets tend to retreat quickly and rally slowly.  Given the bad economic news, it is bullish that we didn’t drop further.  The decline has been too steep to maintain and we with either see a rally or some backing and filling to adjust for the steep angle of the retreat. Naturally, we are above the Ichimoko clouds for the daily and the weekly time-frames.  The bad news is that we have a sell signal on the weekly chart as well as the daily chart.  Our horizontal support lines are at 590 and at 583.  Certainly there are more below but these two lines should support the market. 

 

Crude oil is yet another market with a doji candle in the Friday trading session.  Although we continue to see sell-signals it is important to note, that the lines are beginning to curl to the upside.  The 5-day moving average is at 70.01.  The top of the Bollinger band is at 73.61 and the lower edge is seen at 65.65.  We closed inside the Ichimoko clouds in the Friday session.  We are inside the clouds for the weekly time-frame but continue above the clouds for the monthly time frame.  We do have continued sell-signals in for the weekly time-frame but buy signals for the monthly time-frame.  We continue to believe that it is likely that the market will test the July lows of 62.70.

 Gold has been in retreat for the past three trading days.  We are above the Ichimoko clouds for the daily, weekly and monthly time-frames.  We have continued sell-signals from both the daily and the weekly charts.  The 5-day moving average is at 1007.31.  The top of the Bollinger band is at 1030.89 and the lower edge is seen at 962.49.   We see a downside liability to 982 and 971.10, where we believe buyers will step in.  There is an uptrend line at 963.  This market looks as though it is resting, backing and filling.  We believe that this market will revert to the mean where, it will likely take off from.