Archive for September, 2010

Sunday, September 19th, 2010

The Economy
Well, that was an interesting quadruple witch! Now, we can look forward to quarterly window dressing coming this and next week. Not much has changed in the economy and we see pronounced belt tightening in almost all sectors especially in discretionary spending. Bills aren’t easier to pay, taxes are not going down, and foreclosures continue to flood the markets….so, what is new? We hear that the double dip for the economy is no longer a possibility and that the economy is growing, albeit slowly but growing nonetheless. That drum beat is a little too loud. Bob Farrell’s rule number nine; “when all the experts and forecasts agree, something else is going to happen.” Basically nothing is new. The job market seems to be a little tiny bit better, although this isn’t reflected in the job numbers as yet. We do see a little flutter of activity for entry level jobs. We continue to hear angry voices of tax payers regarding those who have entered our country illegally. We hear stories of Veterans who are upset with a system that gives more financial benefits to illegal’s aliens with anchor children than those disabled American Veterans, that have fought for their country. This is truly an awful situation and we understand why they are so angry. Will this turn into total aggression against those illegal’s that live and work here? It might.

Elections are approaching and the movement for change is obvious. We should remember that change is sometimes good and change can also be bad. Elect people who will benefit the country rather than those who say change is good, or “yes we can…” Make sure there is a plan and that there is some substance in that plan. Perhaps if the elected officials had to live on social security or disability and have health care the way the general public does, they might change things for the better. We should demand that all elected officials have to live with the same rules that we who elected them have to live with.

Volatility
The VIX continues to consolidate in a range from 20.93 to 23.24. There are some divergences seen on the daily chart. For example as the VIX made a new low on September 13, three of the indicators that we follow did not make a new low and made a higher low. This tells us to be aware that something is changing. We see low levels of angst in the market. We do see that the fence sitters are beginning to lose some of their group to the bulls. Thus, people don’t expect anything bad to happen, in the near-term, and they are of the opinion that the market doesn’t have very much risk of a sell-off. Well, they may be correct or they may be trading the rumor waiting to sell the fact. The rumor being touted: that the tax preference items will pass and that the elections in November will throw out the current crop elected officials in favor of “change.” Now, that sounds familiar. The VIX indicates to us that there will be something to move the market either to the upside or the downside by the end of the Tuesday session. This event could be in the Monday or Tuesday session but something will give here. If the VIX rallies and removes the highs of 22.56, you know the break will be to the upside, if on the other hand the VIX declines below 21.63, you will know the break will be to the downside. Another clue for the downside break would be a close below 20.93, which will confirm that we are going lower.

Our Forecast
We are at the end of September, the worst month of the year, and things haven’t been that bad. October is the month of previous crashes, however; those crashes have been followed by rallies. We do have some selling pressure on the market especially towards the end of October, but this year, some of the negativity should be negated by the forecast of the coming elections in November. Those running for re-election would love to see the Bush tax cuts extended. Will it happen, we don’t know. There seems to be a movement a-foot to give the dividend tax cuts to those making less than 250k a year.

Week Ahead
Tuesday: FOMC issues interest rate decision and makes a statement at 2:15PM EST and August housing starts are released at 8:30.
Thursday: August existing home sales are released.
Friday: August new home sales are released at 10:00, August durable goods are released at 8:30 and Fed Chairman Bernanke speaks.

Futures
The US Dollar index rallied in the Friday session. The candle is a long tailed doji like candle indicating that the bears lost the war on Friday. When the bears were in charge, they did not have the power to take the market lower and the bulls regained control and rallied the market into the close, closing the session not far from the session high. The stochastic indicator, the RSI and our own indicator all show that that although the price action of the chart made a lower low, these indicators made higher lows. While this is not a buy or sell signal it tells us that something is changing in the market and that we should be aware and focused for a possible change. The stochastic indicator is issuing a buy-signal. Our own indictor is flat but could issue a buy-signal as early as the Monday session. The RSI is bending to the upside. The Thomas DeMark Expert indicator is flat at oversold levels. The 5-day moving average is at 81.664. The top of the Bollinger band is at 83.76 and the lower edge is seen at 81.29. We are below the Ichimoku clouds for the daily time-frame, above the clouds for the weekly time-frame and in the clouds for the monthly time-frame. On a short-term basis, it looks as though the US Dollar index wants to go higher. The weekly and monthly charts are not positive and warn us that although we could bounce in the short-term, that we might be in for some more downside risk.

The most impressive information seen regarding the S&P 500 December futures contract is that when given the opportunity to decline, it failed to do so. In simple terms, the market wants to go higher and that is what it has been doing. The market broke out of the trading band when it crossed above 1129.50. Unfortunately, the market was unable to sustain that level and although it printed a high for the session of 1132.75 at 3:57AM, 4:12AM and 4:24AM before the NY markets opened, it close at 1119.75 in NY at 16:15 or 4:15 PM. The September futures expired on the opening of the session which might have been the cause for some of the overnight session’s rally. The 5-day moving average is at 1119. The top of the Bollinger band is at 1141.76 and the lower edge is seen at 1025.63. We are above the Ichimoku clouds for the daily and the weekly time-frames, but under the clouds for the monthly time-frame. As to the indicators on the daily chart, both our own indicator and the stochastic indicator are issuing a sell-signal. The Thomas DeMark Expert indicator is going flat at neutral and the RSI is pointing lower. There is a nine-count on the daily chart. There is a line on the chart at 1108. This is an important line for the bulls. Should we drop below that line, we will see the market drop to about 1097 and then possibly 1087.75. Over head on the upside, there is little to stop the market from melting to the upside.

The NASDAQ 100 December future has been in rally mode for the past eight days. Friday’s session left a doji like candle on the chart. It is interesting to note that the stochastic gave a buy-signal on August 31, 2010 and that was a doji like candle as well. Now, we have a sell-signal and another doji like candle. Both the stochastic indicator and our own indicator have issued a sell-signal. The RSI continues to point higher at overbought levels. The Thomas DeMark Expert indicator is flat at neutral. The 5-day moving average is at 1936.25. The top of the Bollinger band is at 1977.97 and the lower edge is seen at 1723.67. To say that this market is overextended would be an understatement. We have a nine-count and signs of exhaustion. When we look at the weekly chart we notice that there is very little resistance to the upside, however; we are overbought as measured by the stochastic indicator. The other indicators have room to the upside. We are above the Ichimoku clouds for the daily and weekly time-frames. We are in the clouds for the monthly time-frame. This index was the winner in the Friday session. Perhaps money is flowing back into the technology sector.

The Russell 2000 expanded the range of trade from the Thursday session but closed slightly below where it opened the session. The stochastic indicator and our own indicator have both issued a sell-signal. The RSI continues flattish just below overbought levels. The Thomas DeMark Expert indicator is flat at overbought levels. If the Russell 2000 can trade above 651.50 (Market Profile) or 652 (Point and Figure), it should rally without much resistance with only a tiny level of resistance at 656 then up it goes. On the other hand, should the Russell 2000 trade below 638.90, it will probably revisit 630, 626.9 and 626. We are above the Ichimoku clouds for the daily and the weekly time-frames. The weekly chart looks as though we could be forming a “W.” Naturally, we would need to close above the neckline of 669 to confirm that formation. The other constraint on that formation is that the Russell 2000 cannot take out the 583.90 level. The 5-day moving average is at 648.42. The top of the Bollinger band is at 665.02 and the lower edge is seen at 585.04. The chart looks as though we will retreat; the question is how far the pullback will take us.

Crude oil looks awful and looks like it will challenge the 70 area again. All the indicators that we follow are pointing lower and have room to the downside. The 5-day moving average is at 75.64. The top of the Bollinger band is at 77.30 and the lower edge is seen at 71.46. We are below the Ichimoku clouds for the daily, weekly and monthly time-frames. The weekly chart really looks flat and is getting oversold. The monthly chart seems to have rolled over and is flat in a trading range. Unless you are short, avoid this market until better signals are given.

Gold is overbought and continues to point higher. We have a doji-like candle on the chart so, please be careful. As you know, a doji signifies transition and possible change. The important word to remember in a doji is possible. We are above the Ichimoku clouds for all time-frames. The 5-day moving average is at 1267.76. The top of the Bollinger band is at 1277.81 and the lower edge is seen at 1224.73. There are no areas of resistance overhead. We do need a rest here and perhaps a pullback will be seen within a day or so. We continue to like gold on pullbacks and would not chase it at these levels.