Stock Market Update 26 March 2009

Welcome to the latest update to ECAM.

It has been a very intense couple of weeks in the market with unprecedented billions of dollars committed by the U.S. government aimed at attempting to "fix" the current deep recession/depression.

The result of all that promised money is a bear market stock rally that has been quite impressive to date.

I want to start by making one thing perfectly clear: we are still in a severe technical bear market decline. This is nothing more than a bear market rally off of an extreme oversold condition that I believe could continue for several months (even into late summer).

I still am of the opinion that we will see lower lows (below the recent March 9 short term bottom of 666 on the S & P 500 index and ultimately down to the 500 level) before this bear market is completed.

What this means is that for risk adverse investors, this market should not be bought (if you are in cash). Until clear technical signs emerge that we have found a true bottom and a new bull market has begun, you would be best to stay liquid.

For those who are currently invested in equities and looking to exit, this will probably be your best opportunity to recoup some of your losses accumulated over the past 15 months before the next downturn. Rallies should be sold.

For those who feel comfortable trading the market on a more short term basis, this will be an opportunity to scalp additional cash before the next major down leg.


With this in mind, I have decided to present the charts in a reverse order from my usual presentation (longer term to shorter term). Click on all charts to enlarge:


Dow Jones World 6 year monthly chart:



The first chart is the longer term 6 year monthly chart. It is clear that we are in the midst of a severe bear market and the month of March will be only the 2nd month in the past 10 with a positive close.

Month to date, the DJW index has returned 12.05% from the March 09 bottom. Until price closes on a monthly closing basis above the 12 month moving average (currently @ 212.70) we are still in a bear market.

It is not uncommon for price to rise to challenge the 12 month moving average before it is rejected downwards in the next leg of a bear market. If this were to occur again, that would be a significant price rise from current levels.


Dow Jones World 2 year weekly chart:



This chart is looking very interesting. First, a reminder that as long as the 13 week exponential moving average {EMA(13)} is below the 34 week exponential moving average {EMA(34)}, we are still in a technical bear market. These crossed at the end of Dec, 2007 and was the signal I used to move 100% out of equities.

On the positive side, note that price has risen above the EMA(13) for the first time in a year. This is a bullish indication that this short-medium rally may have some legs.

Also key is the Full STO has broken above the levels that held it back in Jan and Feb/2009 and appears to be ready to move up above the 50 line. This is a great technical indication on a more medium term basis confirming a stock market rally.

The keys I will watch to confirm it is safe to enter medium term:

1) the full STO passing above 50, and
2) price breaking above the downtrend channel and the previous resistance @ 178.62.

Should this occur, price objectives would be the Fibonacci lines drawn on the chart:

-the 38.2% retracement @ 194.37,
-the 50% retracement @ 214.20,
-the 61.8% retracement @ 234.03

Overall this chart is looking bullish.


Dow Jones World Traditional Point and Figure chart:



The traditional PNF chart has yet to turn bullish but it is close. A closing price print of 166 or more would turn this chart bullish but for now it is still considered bearish.


Dow Jones World 1 box Point and Figure chart:



My more short term PNF chart turned bullish on a price break above 136 and is currently targeting a price objective of 213.


Dow Jones World 6 month Ichimoku chart:



This is a chart I have not published previous as it is not used by many market technicians. It is called a Japanese Ichimoku chart and I use them extensively.

This one chart has 5 different indicators and is a wonderful tool to give a complete picture of the markets. I will not go into all the indications but the 2 most important are:

-price crossing above the red line (known as the kijun sen) on March 16, and
-price attempting to break above the Ichimoku cloud (known as the Kumo).

The cloud represents an "area" of resistance (as opposed to the traditional "line" of resistance). A breakout above this cloud would be a very bullish signal.


Dow Jones World 6 month daily:



Last chart is the 6 month chart with daily trading indicators included. A short term buy signal was initiated on March 12 and since then price has climbed above the 50 day moving average (150.65) and price resistance (153.99). This is bullish.

The next line of resistance is the 100 day moving average (158.81) and the downtrend line at around 167. Should price break above these levels the next targets would be the previous price resistance levels at 178.56, 186.98 and 191.47 followed by the 200 day moving average @ 198.36.

This chart is bullish but price has moved too far-too fast. The market is now very overbought (as indicated by the Full STO > 80) and it is not wise to chase price given the overbought condition.


Bottom Line:

The markets have had a wonderful bounce off the lows from 09 March and the short to medium term has turned bullish. However, the market has come too far-too fast and is overdue for a price correction.

I intend on staying in cash until we have a short term price correction and once that correction is completed I will be switching 50% of my portfolio into equities. At that time, I will assess the technical nature of the US dollar (as of today it is neutral) and may either keep my 50% non equity exposure in USD or hedge the position with either the Euro or the Australian dollar.

As of today, my "strategic" positioning in my provident fund account remain as follows:

-100% Black Rock/MLIM US Dollar Cash Fund (actual positions: USD cash 90%, equities 10%)*

*Strategic allocated percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary several % from that posted (refer to current % holdings).


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