Archive for January, 2014

Sunday, January 26th, 2014

Retreats come and retreats go, what is important for any retreat is the follow through or lack of follow through. Although we do believe that the market is currently still overvalued, we also believe that the “buy the dips” crowd is still waiting in the wings to buy this market. As to the damage done to the chart of the S&P 500, there was significant damage done to the short-term uptrend line by the Friday retreat. That said, we must question if that retreat was a “one-day wonder” or something more ominous. We do believe that we are due for a deeper correction but this may have only been the warning salvo. There will be support for this market at 1754. The longer uptrend line is at 1728 or so. Remember, there is no crime in removing a short-term uptrend line for one day, but should this violation continue for more than two days, the damage will be greater. We are at a period of time when the market will tell us what it is going to do. We believe that some of the weight of the market was seen because the emerging market problems occurred on a Friday leaving the traders nowhere to go but flat in front of a weekend of no trading. As to the NASDAQ 100 the uptrend line held….for now.

There was an article in The New York Times this Sunday entitled: Asking Banks to Reveal Where Their High Rollers Are written by Gretchen Morgenson. Although this article focuses on shareholders rights to know who and where the risks lie, it opens Pandora’s Box and inspires more questions. This is a fascinating article that brings some thoughts to mind. If the bank is taking on accounts that it knows take enormous risk, “high rollers,” should we not say, fine if that is the way they choose to do business but fail at your own risk. If they chose to accept the money generated by these risky accounts should they not be responsible for the outcomes of taking that risk. Say you invested money in a stock and it plunged, went to zero and is worth nada, should the government or the bank make you whole? We think not, it is a business risk therefore if a bank takes such a risk; it too should pay the consequences of poor judgment just as the investor has to. There is no bank that is too big to fail only a government that just might be too big and overreaching. If the rules can protect a bank, they should also be used to protect investors. With that in mind, each and every investor that lost money would be made whole….Not happening!

Should the market bounce back quickly, the buy-the dips crowd will be assured that their behavior is correct and every sale is a buying opportunity waiting to happen? This will teach them to continue buying the dips and eventually, this will not work and they will become decimated. We remind you of the tech bubble and, of course, the financial bubble. Neither of these two bubbles was too long ago, but the results of these financial events seem to have been forgotten by many.

The S&P 500 lost 2.41% in the Friday session closing that session just one tick from the day’s lows. It was a nasty affair for the bulls, but for day-traders, just another day at the office. The HFT were in their glory in that session. If this is a classic “M” formation we can expect to see the index trade down to 1751.50- 1757.75 (depending on which data source you are using). We warned last week that the Bollinger Bands were becoming narrow and likely would expand, which they clearly did in the Friday session. We did see the market close below the lower Bollinger Band which indicates that the market will either trade higher, back inside the bands, or that the bands will expand. The 5-period exponential moving average is 1815.65. The top of the Bollinger Band is 1855.52 and the lower edge is seen at 1804.12. We would expect to see this index bounce back above the 50 day moving average which is 1804.25, then retreat to test the 100 day moving average at 1765.08. The 30 minute Market Profile chart really shows the waterfall of falling prices in the Friday session. When looking at the daily Market Profile chart (which is actually a weekly chart) the retreat looks contained and remains in an uptrend. Naturally, all the indicators that we follow continue to point lower. The RSI is oversold as is the Thomas DeMark Expert indicator but not one of the indicators sports a bend to the upside at this time. When looking at the 1% by 3-box daily point and figure one is amazed at how little the 2.41% retreat affected this chart, however; the 60 minute 0.2% by 3-box chart paints quite a different picture. The 60 minute chart has a downside target of 1766.09 which is close to the 100 day moving average of the candlestick chart. We have a broken uptrend line and downtrend lines on this chart. Here is the game card; we will rally back to the 50 day moving average or the neckline of the “M” at 1809.50. At that point, some of the longs are going to leave putting some downside pressure on the market but the market will try to bounce back to 1795.31 and then 1809.50 or so. The market will bounce so long as nothing else blows up over the weekend. The question is how much damage was done in this downdraft. Our guess is that it will be talked away quickly but foolishly. It was a warning of what our risk is and tells us that all is not well. We closed inside the Ichimoku Clouds for the daily time-frame but remain above the clouds for the weekly and the monthly time-frames. The volume for the S&P 500 for the Friday session was the strongest seen for 2014 but in the bigger picture, while heavy was not as strong as see in other times from August to December 2013.

The NASDAQ 100 lost 2.38% in the Friday session yet remains above its uptrend line. True it is sitting right on the line but didn’t break it. It is hard to believe that the NASDAQ 100 made a high for the year in the Thursday session. Thursday was an outside day and a key reversal day which warned us of problems. Friday the market retreated but did not break the uptrend line from November 2013. We are above the Ichimoku Clouds for all time-frames. The market closed inside the Bollinger Bands. The upper edge of the Bollinger Band is 3629.96 and the lower edge is seen at 3507.73. The 5-period exponential moving average is 3580.92. The upward trending channel lines are 3665.79 and 3527.38. All the indicators that we follow herein are pointing lower and not one is oversold. This is not to say that the Friday retreat was nothing to notice but taken in a bigger picture context it was less severe than that seen in the S&P 500. The Market Profile 30 minute chart (really a daily activity chart) illustrates clearly how difficult and painful the Friday retreat actually was. The daily Market Profile chart continues to show a market in an uptrend….go figure! The other point to notice is that although the volume was robust, it was not abnormally high. The 60 minute 0.2% by 3-box chart has a downside target of 3483.69. There is an internal downtrend line and the RSI has turned down. Clearly this chart does not looks as bad as a candlestick chart looks. The daily 1% by 3-box chart looks fine with no downtrend line or downside targets.

The Russell 2000 printed a life of contract high in the Thursday session printed a key reversal day and plunged on Friday in harmony with the other financial indices. The Russell 2000 remains above the Ichimoku Clouds for all time-frames and above the uptrend line. This index moved into the January gap on the chart but failed to fill it. The 5-period exponential moving average is 1160.46. The top of the Bollinger Band is 1178.97 and the lower edge is seen at 1139.74. We closed slightly below the lower edge of the Bollinger Band. The volume seen in the Friday session was the highest for 2014 that said, it certainly wasn’t the highest when looking back at December 2013. All the indicators that we follow herein are pointing lower. We touched and bounced off the 50 day moving average. We are not over sold as measured by the stochastic indicator, our own indicator and the RSI.

Crude oil retreated in the Friday session losing 0.43% on the day. This market has been very erratic, to say the least. Although both the stochastic indicator and our own indicator continue to point higher, they are losing momentum in that ascent. The RSI has begun to curl over to the downside. We are inside the Ichimoku Clouds for the daily time-frame, below the clouds for the weekly time-frame and above the clouds for the monthly time-frame. At this moment we continue to see a buy-signal issued by our own indicator, we are concerned that this buy, although still valid, could change. The 1% by 3-box daily point and figure chart has downtrend line and no uptrend lines, but the RSI is beginning to flatten and has lost its downside thrust. The 0.2% by 3-box 60 minute point and figure chart has internal up and downtrend lines. There is a level at 96.29 which needs to hold if, this market is to continue to the upside. Both our own indicator and the RSI have turned down for this time-frame. The 5-period exponential moving average is 96.15. The top of the Bollinger Band is 99.71 and the lower edge is seen at 90.22.

Gold rallied in the Friday session tacking on 6.5 points. Really not much when looking at the turmoil in the market as the Argentine problems spilled over to the global markets. All the indicators that we follow herein continue to issue a buy-signal but are if not overbought approaching overbought levels. The 5-period exponential moving average is 1256.08. The top of the Bollinger Band is 1273.17 and the lower edge is seen at 1200.84. The up trending channel lines are 1277.60 and 1232.57. The 1% by 3-box daily point and figure chart has a downside target of 1059.16. The RSI has turned upward as has our own indicator. The 60 minute 0.5% by 3-box chart has a fresh upside target of 1315.62 as well as a solid uptrend line. The RSI and our own indicator are both pointing higher.

The US Dollar Index sure had a volatile week, with a nearly 91 cent move to the downside Thursday. The index closed the Friday session at 80.51, near our support level, but not before dipping down to 80.17. The 20-period simple moving average is 80.75, the 5-period exponential moving average is 80.76 and the index is currently below both. The Bollinger Bands are currently starting to turn in with the upper band at 81.41 and the lower band at 80.09. Our indicator is issuing a sell-signal while the RSI is starting to point up. It is worth noting that the RSI has been forming a triangle since July, creating ever increasing lows and ever decreasing highs. In terms of support and resistance on the daily chart, we are hovering around the 80.50 support level and on Friday, dipped below the down trend line we had broken above in early January. If this level can hold the index will likely run into some resistance around 80.75 and make its way to 81.50 above that. Should this level fail, there is strong support around the 80 level though we shouldn’t be surprised to see a retest of 79.60-79.70.

Looking to the weekly chart, all the same support and resistance lines are still holding. 80.14 on the downside, which we touched this week, will be downside support with 79.61 the safety net below. On the upside; 81.50 is still a target with 81.75 hanging out in case of a spout of ambitiousness.

The 30 minute.05 Point and figure Chart is in a downtrend and has achieved the downside target of 80.30. There is still one activated upside target of 81.50. The point and figure chart highlights a concerning note. We have a newly achieved downside target and an upside target that was not achieved. While that is not to say this upside target won’t be achieved, this is something that ought to be concerning. Further, on the daily chart, we filled to meet the old 81.50 high. Though we would like to wait to see if the currently 80.51 level holds, these are points to be mindful of.

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