Archive for June, 2014

Sunday, June 29th, 2014

The Fed’s problems will begin to escalate soon. Crude oil has been in rally mode in part due to the chaos in the Middle East, however; the appreciation of that product results in a silent tax on the consumer and, a leg up for inflation. The Fed’s actions to ignore inflation will continue to help the markets while the increase in crude products will dampen spending for the average consumer. There is only so much money in the pot at the end of the month and if it all is used for necessities then there is nothing left for discretionary spending. The average earner needs to spend more for this economy to expand. With a silent tax such as the cost of petroleum products, the belief that the consumer will increase spending is not in the realm of reality. The Fed’s problem in this puzzle is that as petroleum prices advance inflation advances and we enter yet another year of stagflation. The Fed might feel the need to increase rates, which could tip the economic equation into a recession. Meanwhile if the Fed keeps interest rates at zero the economy remains stagnant and does not move forward.

This “bull market” is now 63 months old, which by any measure, is “long in the tooth.” In spite of the age of this market, the complacency is alive and well. Please always remember that we cannot forecast when this bull market will end. Bull markets last longer than you might expect so to state that it will end in a week or month is folly. We can tell you that the market will enter a soft period in August-September. This is a seasonal neurosis that occurs each year as we approach the dreaded October. The joke is that the market usually has worn out the downdraft by mid-October and then tends to rally into Halloween.

The S&P 500 rallied in the Friday session adding 3.50 on the day. We seem to be stuck in a trading range and have been going sideways since May. At the moment, we have a buy-signal issued from the stochastic indicator, our own indicator and the RSI. The Thomas DeMark Expert indicator continues to issue a sell-signal. The Bollinger Bands are flattening out and indicate to us that there will be, in the not too distant future, a return of volatility. The top of the Bollinger Band is 1962.54 and the lower edge is seen at 1912.80. The 5-period exponential moving average is 1948.93. We are above the Ichimoku Clouds for all time-frames. All time-frames, daily, weekly and the monthly charts show a very clear uptrend for this market. The channel lines for the daily chart are: 1943.66 and 1986.51. The S&P 500 is stair-stepping its way higher. The 60 minute 0.1% by 3-box point and figure chart has an upside target of 1972.8. We just broke above the downtrend line and the chart remains positive. The daily 1% by 3-box chart has an upside target of 2278.81 and remains above the uptrend lines. The Market Profile chart shows how range bound this market has been. Until the market tells us otherwise, we will remain friendly towards this market with very tight stops.

The NASDAQ 100 rallied in the Friday session making a new high for the year adding 14.25 on the day. This market outperformed the S&P 500 index. The upward trending channel lines are 3794.37 and 3846.12. The 5-period exponential moving average is 3813.55. The top of the Bollinger Band is 3836.52 and the lower edge is seen at 3726.64. This market broke above its trading range this past week. All the indicators that we follow herein continue to issue a buy-signal at overbought levels. We are above the Ichimoku Clouds for all time-frames. The Market Profile chart clearly shows that this market broke to the upside. The daily 1% by 3-box chart has an upside target of 3978.36 and not a downtrend line in sight. The 60 minute 0.1% by 3-box chart has an upside target of 3881.08 and is very positive. The charts indicate that the NASDAQ 100 has more upside. Again we are very cautious and will declare that we could change from positive to neutral and perhaps negative in a nanosecond.

The Russell 2000 enjoyed a rally in the Friday session perhaps because of the annual re-balancing of this index. As you probably know, this index is only re-balanced once a year and that event tends to propel the index higher. The reason is simple of the 2000 issued in the Russell 2000 some are removed during the year thus when the new issues are added the value of the index jumps to reflect its new composition. The 5-period exponential moving average is 1177.56. The top of the Bollinger Band is 1200.28 and the lower edge is seen at 1123.60. The Russell, although it rallied smartly in the Friday session, still hasn’t been able to make a new high for the contract and as a matter of fact, did not make a new high for the week. We remain cautious on the Russell 2000 in spite of the fact that the risk trade is on.

Somewhere in your grandmother’s attic is a painting of the US Dollar Index getting Uglier… The index closed the Friday session at 80.04 down a little less than 32 cents for the week. On a daily time frame we see a rounding top and increased volatility as this market moves to the downside. From a weekly perspective this market is coiling, consolidating and getting ready to break. Looking to the daily chart The Bollinger Bands are currently expanding with the upper band at 80.84 and the lower band at 80.13. The 20-period simple moving average is 80.48, the 5-period exponential moving average is 80.21 and the Index is below both. Our indicator is issuing a continued sell signal as is the RSI (which also happens to be making lower lows).

The daily candle chart shows a perfect rounding top, with downside potential at 79.76 and 79.45 below that. What is interesting to note is that while this index is clearly in a down trend, it has been very difficult to mark off a down trend line… Volatility anyone? The 30 minute .05 x 3 point and figure chart shows the rounding top and down trend even more clearly. Two of the downside targets have been achieved (80.3 and 80.05), typically indicating continued bearish action, and there are multiple active downside targets at 79.95, 79.55 and 79.35. Turning to the weekly candlestick chart we can see this market has been consolidating for two years and will likely move towards 79.65 in the week ahead. Long story short, hold onto your butts.

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