Archive for September, 2013

Sunday, September 22nd, 2013

The economy reminds us of the scene from the Wizard of Oz where Toto, Dorothy’s dog, pulls the curtain back revealing the Wizard controlling the frightening noises and sounds created in the hall, to scare Dorothy and the motley trio that accompanies her. We have a Fed which is much like the Wizard with his controls. They make frightening noises and attempt to control the economy. Alas they have been unable to use monetary stimulation as a solution or cure for the more serious problem; to stimulate the punk economy. The only stimulation occurring is that the rich are getting richer and the banks are raking in money on the spread between their cost of borrowing and the meager lending they are doing. Oh yes, corporations are able to borrow money really cheaply and this borrowing it is helping either buy back their own stock or merge with another company. The little guy, those who make a middle class wage, gets to pay more for groceries, taxes and increasingly pay for a greater portion of health insurance. In other words, the bills keep rising and the paycheck, well that seems to be decreasing. The facts are that wages, for this sector of the population have been declining slightly for years. Instead of making more money, people in this income bracket make less than they did say ten years ago, when inflation and real left over earnings are considered. Want to know why the economy is not expanding, start your research here.

Now that the FOMC excitement has passed, we can now concentrate on the budget and the squabbling in Washington, D.C. Neither group is correct, we can benefit by cut-backs in free services that the government can no longer afford, but we must maintain our global credibility. In simple English, we cannot afford to do anything to downgrade our credit ratings. It would be catastrophic if we let that occur and will cost our government a great deal of money. That cost also flows through to the tax payers as an additional cost for borrowing. These events are like a chess game, you move a piece and other future moves can be anticipated by the brilliance or lack of brilliance of that initial move. Government is like that, for every reaction there is an additional reactions that occurs. We have to plan well to avoid errors which could have very onerous results.

As we enter October remember that mutual funds must make their adjustments for tax losses and gains by the end of the month of October for the tax year 2013. This does not apply to ETFs of ETNs. We also begin to see some tax selling and bond swaps occur.

The S&P 500 enjoyed a robust rally once the Fed removed the threat of a taper for the current month. The market posted a new high in the Thursday session and then on Friday the market retreated removing most of the Wednesday advance. Our 38.2% retracement number is 1687.67 and the 50% number is 1675.37. We could even trade as low as 1663.07 without destroying the uptrend line. All of the indicators that we follow herein have curled over from overbought levels and are now pointing lower. The 5-period exponential moving average is at 1714.84. The Bollinger Bands have begun to expand again. The top edge of the Bollinger Band is at 1734.53 and the lower edge is seen at 1607.34. We are above the Ichimoku Clouds for all time-frames. The weekly chart shows a gap created this past week. We closed the session Friday the 13th of September at 1688.5 with a high of 1690.50 on the day. We opened on Monday September 1698.50 with a low of 1694.75 for the day and the week leaving a gap of 4.25 on the chart. The action on Thursday left a doji candlestick on the chart and warned the observer that there could be a change in direction. Another warning was seen when the market printed a new high but failed to close anywhere near that high. The action on Friday could have been far worse than was seen. The Market Profile chart of the Friday session clearly shows that most of the trading was seen on the downside. The high volume trade was at 1702.50 with 9.3% of the day’s volume at that price. There was a curious divergence seen in the Russell 2000 which only dropped 4.90 on the day when compared to a drop of 13.75 in the S&P 500…. Some of the downdraft seen late in the Friday session could have been caused by weekend anxiety trades, going flat in front of a weekend. The bull is not dead just wounded. We will revert to the mean and are far above it at the moment.

Something strange happened to the NASDAQ at the close of the Friday session. There is a difference between the electronic session and the pit session. The electronic session shows that the market retreated 15 points or handles while the pit session retreated 15.75 handles. Doesn’t sound like much of a difference but it is notable. The Friday session was an outside day which had really negative implications in that we made a new high then proceeded to close very close to the low of the day which was lower than the previous day’s low. The 5-period exponential moving average is 3207.36. The top of the Bollinger Band is at 3246.47 and the lower edge is seen at 3042.97. The uptrend line for the Monday session is at 3159.87 although we would allow for a test of 3157.50, a level that would pierce the line, we continue to have a bullishly bias if that level is a momentary penetration and does not last very long. Should these numbers fail to hold up this market, then we will test the 3059.50 level. The NASDAQ 100 daily 1% by 3-box reversal chart remains bullish; there are no downside lines and no downside targets. The 60 minute 0.1% by 3-box chart does show the current retreat but isn’t sending up any warning flags. We must warn you that the last candlestick is negative and we advise that you remain alert to any radical changes in the price action of the chart. One candlestick does not make a trend and currently the trend remains to the upside.

The chart of the Russell 2000 shows a decline of 4.90 on the day with the low print 1068.10 just slightly lower than the closing price of 1069. The chart looks as though it could be forming a bull flag. We would expect the market to stay above the short-term uptrend line at 1064.50 to remain bullish. We have a less steep line at 1033 or so. All of the indicators that we follow herein are issuing a sell-signal from overbought areas. The exponential moving average and the Bollinger Band numbers are not given this week because of a glitch in the data. We are above the Ichimoku Clouds for all time-frames. 17.8% of Friday’s volume occurred at 1072.50. Moving to the upside of that level, the volume retreated quickly and down from that level the volume was 17% for 1071.75 and 1071.00, from these levels the volume again retreated. When looking at the chart of the Russell 2000 ETF we note that the 1% daily 3-box reversal chart has some upside targets that have not been met. We also not a series of uptrend lines on the daily chart, the 60 minute 0.1% by 3-box reversal chart is also positive. This index performed far better than the S&P 500, the NASDAQ 100 or the midcap S&P 400 indices. It is true that this index does not have Apple in it but that isn’t the full story.

Crude oil is stuck in a trading range from about 102.22 to 110.68. Yes we know that was not the high but we viewed the high as an irrational data point led by short covering and not confirmed. The downtrend line that this product must remove is 108.79. That would not take it out of the rectangle but would put crude in a better position to challenge the upper edge of the rectangle. The 5-period exponential moving average is at 106.26 and we are below that level. The top of the Bollinger Band is at 110.46 and the lower edge is seen at 104.94. We closed below the lower edge and it is likely that we will crawl back inside the bands within a day or so. We closed inside the Ichimoku Clouds for the daily time-frame. We are above the Ichimoku Clouds for both the weekly and the monthly time-frames. The RSI, the stochastic indicator and our own indicator are all pointing lower although they are becoming oversold. The uptrend line drawn from June is at 102.32. The most frequently traded number in the Friday session was 105.50 but the high volume number was 105.25 with 25% of the day’s volume. The week’s high volume area is 105.00 with 17.9% of the volume. This market does not look good but until we break out of this trading range in one direction or the other, we will remain neutral.

Gold retreated in the Friday session removing almost all the gains seen on Wednesday right after the FOMC announcement. We are above the Ichimoku Clouds for the daily time-frame but below the clouds for the weekly time-frame and in the clouds for the monthly time-frame. Both the RSI and the stochastic indicator are issuing a sell-signal. Our own indicator looks as though it might issue the same signal in the Monday session. The 5-period exponential moving average is at 1341.15. The top of the Bollinger Band is at 1441.07 and the lower edge is seen at 1302.33. For this market to take a positive stance it needs to close above 1371.90, 1391 and then 1476. There should be good support at 1302, 1272.47, and then 1179.83. The daily 1% by 3-box point and figure chart continues to look as though it could trade lower and the 60 minute chart confirms that finding. The market continues to fail after short rallies. Until this market demonstrates an upside direction, we will remain neutral to bearish. We do not wish to take a short position but simply will stand aside until a future direction is indicated.

We all remember that old childhood adage undoubtedly told to us by a doting grandparent, how does it go… support becomes resistance and resistance becomes support? Well at least that is the adage heard by those of us who were weaned on Bob Farrell as opposed to Dr. Seuss… The US Dollar Index had an incredibly interesting week. The Friday session closed with the index up for the day ending the session at 80.47. The week, however; saw a sizable move to the downside with the break of a trendline that has held this market in check since early 2011. There is a lot going on in the charts this week. Daily trends have come into conflict with weekly trends and among the changing tides we have, you guessed it, lots and lots of volatility! On that note, the Bollinger Bands are of course expanding, with the upper band at 82.85 and the lower band at 80.35. The 20-period simple moving average is 81.60, the 5-period exponential moving average is 80.70 and the market is below both of these levels. The RSI is crossing the 30 level (though it is doing so very slowly and our own indicator is on the verge of issuing a buy signal.
The Dollar Index spent much of the summer in a downward sloping channel. Depending on how you drew your trendlines, the index has either pulled back to the trendline or broke below the trendline and is now struggling to break above it. Regardless of your artistic talent and what you saw in the ink blot, there are significant support and resistance levels at the 80 level and 80.60 level (where the index pulled back to and where it bounced). We see lots of converging levels found on horizontal support/resistance and sloping trendlines, this emphasizes their significance. Looking at the chart below, the index does not like to sit in this 80-80.60 level for long periods of time. Over the past few years this area has acted as strong support and strong resistance, but not a place to stay.
Looking to the weekly chart we can see something explosive was bound to happen. Sure you might say, there was this gigantic Fed meeting we all knew that! While this is absolutely correct, this information was conveyed through the actions of market participants and thus it is visible on a chart. This week the uptrend line was broken, that line had been in place since January of 2011. This uptrend line was in direct conflict with the down trend channel that had formed on the daily chart. One of them was destined to break.
The 60 minute .05 x 3 Point and Figure chart shows we are still in a down trend with several internal trend lines having formed. There are still 2 unachieved activated downside targets. The most recent one is at 80.10, followed by 77.80. We have learned to trust our point and figure charts and not to fight them. Given all of the above, we feel the index still has some room to the downside. Though the continuing move may not be quite as violent as the moves seen this past week, we believe that some as backing and filling might be in order. It is likely that the index will pull back to the 80 level and, not being a huge fan of the 80-80.60 zone, move into the congestion zone right below it that has acted like fly paper oh so many times.