Archive for December, 2012

Sunday, December 30th, 2012

Fiscal Cliff or not, they are getting a raise…..What! Just read it yourself! We cannot believe this. The executive branch is taking the dictator stick and making decisions which should be made by those of us who pay taxes. Bam…. President Obama orders a wage increase for all members of both houses and the vice president.

We just would like to remind you that “we the people” pay the taxes that enable these elected people to get a raise while our seniors and our people are suffering the results or zero coupons on their invested bonds and increasing costs of living. Yet, our executive branch has the nerve to order the salaries of those, who make so much, higher. It truly is not the case of paying them more to stay; after all they fought to get there. All this was done behind the headlines of a fiscal cliff to hide the dirty deeds of the executive branch. Shame on you!

S&P 500 weekly indicators have turned lower, all of them. We are sitting near the edge of a large pattern. The uptrend line on the weekly chart is 1384.91 and the downtrend line is at1423.41. Should we remain in this path we will hit a point of inflection during the week of March 11th which will be explosive. That said, if we move aggressively to the upside, beyond the downtrend line, or aggressively to the downside, we will negate this outcome. The monthly chart offers the same conclusions but just a week later. This tells us that something really big is going to happen in February. The indicators on the monthly chart have given a sell-signal. One of the trendlines dates back to March of 2009 and the second trendline dates back to August of 2011.

The October 2002 low of 767.25 was removed in March of 2009, and that is the point where the uptrend line begins. The rally in 2002 added 819.25 points before the steep retreat in to the March low of 2009 (665.75). Measuring the rally from the March low of 665.75 to the recent high of 1468 is a rally of 802.25 points which was seen in just three years while the previous rally of 819.25 points took five years to complete. Is this the top of the current rally, probably not. We would expect to see the rally remove the 1586.75 high seen in October of 2007. Should that occur, then this rally from the 2009 bottom will have tacked on 921 points! The decline from the October high of 1586.75 took only one year and about five months to complete, verifying the fact that down moves are a lot quicker than up moves, unless you see a flash crash.

Here is what we see as possible for the next year. Unless or until this market closes below 1068 on the S&P continuous futures contract, we will give it to the bulls and projects that after some fits and starts the market removes the high of 2007, but only marginally. This market is supported by the “nowhere else to go” theory of returns. The debt market offers little in the way of returns and even if the preferential treatment of dividends is abolished the dividend paying stocks will continue to outperform. When will you know where there is a possible top? Simple answer is when stocks no longer supply better yields than bonds supply. Simply put, if a AAA bond yields 3% and a stock dividend yield is 3% it is likely that the bond will win, and money will leave the stock and head for the bond. Why? With a AAA rating the bond is perceived as safe and a place where total principal will be returned on the due date or in some cases before the due date in the event of a call. The stock will always have an element of risk to it as its price advances and retreats. Remember money doesn’t care and doesn’t have loyalty to anything but returns. Even if Uncle Sid gave you that stock, it is just a tiny itsy bitsy piece of ownership in a company so if the company makes less money, you make less money. That is a very simplistic view and should be taken as such.

As to the Volatility index, it has broken out from a consolidation which began in June of 2012. We expect to see the VIX retest the breakout level of about 17 to 19 before it continues aggressively higher. Our upside target for the six-month term is about 26 or 27. Should we close above that level, we will likely revisit the mid-40s. This scenario isn’t exactly positive for the stock market and tells us that about mid-year, the market should feel some real pain. Although we can move higher in the short-term it is unlikely that we will move much beyond the 27-28 levels. On the flip side of the coin should this market close below 13.38 or so, it is likely that we will revisit the 9.68 lows of 2005 and the 9.39 lows of December 2006 which was a tad higher than the previous low of 9.31 seen in December of 1993.

Our bottom line is this; we expect to see some upside movement in interest rates this year. Yes we understand that the Fed had signaled that it will not move the dial away from the zero level, but it is likely that some buyers of yield will demand more return for the perceived risk that is being taken. This will push yields higher even if the Fed is at zero. Remember there must be buyers willing to purchase these bonds. Our concern is that there will come a point where yield on a safe bond will compete with the yield earned by investing in a stock for its dividend. The Fed is counting on this “nowhere else to go” trade to keep the markets in rally mode and to prevent a downside slide. For now it is working but that will not last forever.

All of this should lead to a rally in gold and silver as it is perceived as a currency. Although gold has performed poorly we continue to believe that in the end, it will retain its glitter.
Let us look at a monthly chart of the NASDAQ 100. We placed a Fibonacci retracement from the top of the NASDAQ 100 (4884) seen in March of 2002 to the low of 797.5 seen in October of 2002 and this is what we see. The NASDAQ 100 poked through the 50% retracement number in September of 2012 then quickly retreaded lower. The NASDAQ 100 could easily trade up to the 61.8% level of (3327.54) and remain in a long-term corrective phase. So our upside maximum target for the 2013 year is 3327.54. Do we believe that this will happen, probably not. On a daily basis, this index is getting oversold but still has room to the downside. We will rally before testing the 2492 level. Should that level fail to hold his market…..we have 2433.75. When reviewing the weekly chart, it really looks like a head-and –shoulders top. The indicators on the weekly chart are all pointing lower with plenty of room to the downside.

To sum up, we expect the S&P 500 to send us a directional guide-post in about the second week of March. We do not expect any retreat seen in this index to become severe until or unless bond yield equal stock yields. This could become a reality in the last quarter of 2013. If that does occur, we will end the year below where we began the year dipping as low as 1077 before a last minute rally to close out the year. The NASDAQ has a similar pattern and we would not be surprised to see a slide to 1972.25 before rebounding back to close the year at 2351 or so. The Russell 2000 which generally leads the January rally is on shaky ground. The weekly indicators are all pointing lower and yield starved investors will likely not look to these small capitalizations stocks for investment. Gold will continue to act as a currency. At the moment it looks awful but after some more downside cleansing, we expect the pretty metal to rally and close the 2013 trading year at about 2300.

The US Dollar Index went on hiatus this past week and did a whole lot of nothing. Indeed, every trading day this week resulted in spinning tops on the daily candlestick chart, those are days with opens and closes close together for those of you illiterate in candle speak. The Index closed the Friday session at 79.79 and is currently above the 5-period exponential moving average (79.71) and slightly below the 20-period simple moving average (79.81). The Bollinger Bands are not expanding nor contracting with the upper band at 80.46 and the lower band at 79.16.

We have what continues to look like a head and shoulders top on both the Weekly chart and the Daily candle stick chart. What is overwhelmingly evident is the index is currently sitting in a congestion zone. For us to truly be scared the index would have to break below 78.72. For us to begin to feel elation we would need to move above 80.38.

The 60 minute .05 x 3 point and figure chart continues to have one activated upside target at 80.90 and the index had edged its way up to the downtrend line following last Friday’s rally but has since formed a poll. Though we would want to see confirmation with a break below the congestion zone, we still feel this index has plenty of room to move to the downside.

The S&P 500 had a really bad day in the Friday session closing down 1.7% on the day. This very large red candlestick stayed between the downtrend line and the uptrend line, touching both lines. We closed below the lower Bollinger Band and will likely move back inside that band. The upper edge of the Bollinger Band is at 1443 and the lower edge is seen at 1387.29. The 5-day exponential moving average is 1406.94. The stochastic indicator, the RSI and our own indicator are all pointing lower for the daily time-frame. The weekly time-frame shows that all the indicators are pointing lower with plenty of room to the downside. The downtrend line on the daily, weekly and monthly chart is at 1431.07. The shorter uptrend line is at 1362.92 and the longer uptrend line is at 1362.92. The first time the shorter uptrend line and the downtrend line meet in on or about on March 11, 2013. There is another meeting of the lines on June 10, 2013 using the longer downtrend line. These numbers are verified by the Market Profile chart. The daily 1% by 3 box chart shows that we are trading between a downtrend and uptrend line. A downside target has been triggered on the daily chart at 1309.53. The true damage of the Friday session can be seen in the 60 minute 1 by 3 box chart which shows a new downside target of 1341. Be very careful trading these markets, stability is not present at this time.

The NASDAQ 100 declined 1.43% in the Friday session. We are inside the Ichimoku Clouds for the daily time-frame but above the clouds for both the weekly and the monthly time-frame. The 5-period exponential moving average is at 2624.20. The top of the Bollinger Band is at 2711.79 and the lower edge is seen at 2600.73. All of the indicators except the Thomas DeMark Expert indicator continue to point lower and are getting oversold. We will likely bounce within a day or so to return inside the Bollinger Band. Will that bounce be something more than a relief rally? Time will tell us shortly. The Market Profile chart tells us that above 2707.50 we will likely melt to the upside. Below 2574.50, we should feel pressure pushing us towards 2498.50. The 1% by 3 box daily chart shows a downside target of 2395. We seem to be in a congestion area trading between downtrend and uptrend lines. The 60 minute 0.1% by 3 box chart is showing a downside target of 2457.99 and shows the market below the downtrend line with no uptrend lines. This chart is troubling for any bull to look at.

The Russell 2000 declined 0.97% in the Friday trading session. This index was the best performing of the indices covered in this report. We are above the Ichimoku Clouds for the daily time-frame and the weekly time-frame. All of the indicators that we follow herein continue to point lower with no indication of bounce. That said, we expect to see a bounce within a day or so. The 5-period exponential moving average is at 833.92. The top of the Bollinger Band is at 853.59 and the lower edge is seen at 809.96. The Market Profile chart shows us that above 852.50, we will melt to the upside and below 810.00 we will likely break down and trade to lower levels. The point and figure 1% by 3 box daily chart shows an unfilled downside target and a market trading up against the downtrend line. The 60 minute point and figure chart is less bullish than the daily chart is. Neither chart is really bullish at all.

Crude oil declined in the Friday session but managed to close out the week better than the previous week. We are inside the Ichimoku Clouds for the daily time-frame but we are below the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The daily chart looks like a rounding bottom which is moving to the upside. The 5-period exponential moving average is at 90.27. The top of the Bollinger Band is 91.61 and the lower edge is seen at 84.71. All the indicators that we follow continue to point higher but have lost their momentum to the upside. The Market Profile chart tells us that above 91, we will melt to the upside and likely will trade to 92.50. Above 94.50 we will move aggressively to the upside. The daily 1% by 3 box chart continues to look as though this market could trade to the upside. The 60 minute 1% by 3 box chart shows a new upside target of 100.18. Crude oil looks good.

Gold left a bearish red candlestick on the chart as a result of Friday trading session. We are below the Ichimoku clouds for the daily time-frame, in the clouds for the weekly time-frame and above the clouds for the monthly time-frame. The 5-period exponential moving average is at 1660.66. The top of the Bollinger Band is at 1731.99 and the bottom edge is seen at 1640.62. Although we are somewhat oversold on the daily chart, the indicators sending mixed signals, some positive and some negative. The weekly chart shows all indicators positive. This chart looks awful on a very short-term basis. Purely from a technical point of view of the daily chart, there is no reason to be long this product. The downward trending channel lines are 1689.56 and 1623.10. The Market Profile chart tells us that above 1724.80 the bulls will rejoin the party and the market will likely rally to the 1778 level. On the other hand, below 1631.70 this market will decline finding its first support zone at 1617.