Stockmarket and USD update 26 July 2009

Welcome to the latest issue of ECAM.

Wow, what a ride the last couple of weeks have been in the markets. Sort of like a space shuttle launch......I am just hoping it is not a repeat of the "Columbia" launch.

In my last blog I presented what was technically known as a Head and Shoulders topping pattern. In that article, I spoke about what "should" happen given the pattern. There are times when the patterns do not materialize as they "should" and this was one such event.

The morning of Monday, July 13 Meredith Whitney (a well known independent bank analyst) came out with some bullish comments about Goldman Sachs on CNBC. That started the reversal that was reinforced on Wed, July 15 when Intel reported quarterly results that beat the street estimates. We have been on a parabolic rise ever since.

As near as I can tell given my indicators; these 2 events resulted in the bears covering their short positions when the neckline of the Head and Shoulder pattern most were betting on was breached to the upside (a bear trap leading to a short squeeze) combined with the some of the bulls who have been sitting on the sidelines waiting to commit new cash to the markets moving a small amount into equities. The markets have been on a rocket shot upwards ever since.

Technically my greatest concern is the lack of a significant decline off the head and shoulders top. If the markets had retraced to the levels indicated by the head and shoulders, it would have resulted in reducing the overbought levels of the markets to a point where a new rise could begin. Not having done so has left the markets in a SEVERE OVERBOUGHT position. This unto itself does not mean a significant market decline and/or crash but it does change the dynamics as to how a new rally might unfold.

From a fundamental point of view there is very little to like right now about the world's economies. Having said that, the market is trying to anticipate a turn around as stock markets generally tend to lead economic recovery by 6-8 months. The question is whether this is truly the start of the next bull market or nothing more than a very strong bear market rally. For that we will look at the charts (click on all charts to enlarge).


SPX 6 month daily:



This chart is a 6 month daily chart of the S & P 500 Index.

Keys to note:

1) the 877.86 support level held on a daily closing basis even with all the bears piling in on the short side when the Head and Shoulders top was confirmed. This is a very bullish sign.

2) the strong resistance level of 943.85 (and peak of 956.23) was breached with apparent ease after holding for months. This is another bullish sign.

3) all my short term trading indicators switched to bullish on July 15 (as indicated on the chart). Another bullish sign.

4) the markets are very overbought. The RSI closed at 71.78 on Friday’s closing price. The "overbought" threshold is defined as an RSI > 70 and as of Friday it is at its highest level since the bottom in March/2009. Can the markets continue higher......absolutely. However, given how overbought they are currently, the odds favor a pull back much more than a continued rally. The key to investment is to buy when the markets are in your favor; right now the short term odds are against you.

Given this environment, in my opinion it would be unwise to commit new capital to the markets at this point. The odds favor a pullback. Given the current technical picture, I will use any forthcoming pullback as an entry point for equity purchases in my provident fund (for full disclosure, my trading account outside the provident fund is fully invested long SPX with a stop @ 943).


SPX Point and Figure Traditional:



The PNF chart went bullish on a price print of 935. The projected target is 1190. This is very close to the 1200 level I will speak about below.


SPX 1 year daily:



A 1 year daily chart that clearly defines the support level of 877.86 (which held the previous decline) and the former resistance level of 943.85 (which should now act as support).

I've put in a potential uptrend channel and the next level of resistance @ 1007.51. This resistance level is quite weak so I do not expect it will provide much in the way of significant resistance.


SPX 2 year weekly:



This is a chart I use for my own trading account but have not presented it before on the blog. It is a 2 year weekly chart with volumetric support and resistance levels charted along the vertical axis on the left hand side of the chart.

The interesting thing to note is the strong support and resistance levels we have been stuck within since mid March. Note we are right at the key resistance level as of today. In addition we are right at the down trending line extending from the intermediate top from May, 2008.

Should the weekly price break above this resistance level and the accompanying downtrend line that would be a very bullish development. The reason why is because above this level there is very little volumetric resistance all the way up to approximately 1200 as can be seen on the chart (remember my PNF chart previous shows a target of 1190).

This needs to be watched very closely; we are literally at a "make or break" point in this rally. Above here is very bullish; a breakdown could be very bearish.


SPX 3 year weekly:



The first of my "long term charts" looks good but we are not there yet. Once again, the 13 week exponential moving average has not crossed above the 34 week exponential moving average. We are damn close and it would only take a few more weeks of bullish activity to turn this chart back to bullish.

All the other technical indicators on the chart look good BUT the 13/34 cross has an EXCELLENT history of being right way more often than it is wrong. As such, it is still too early to call this a new bull market.


SPX 10 year monthly:



The second of my "long term charts" looks great. Price has broken above the 12 month simple moving average but it would take a close above the 12 sMA at the end of July to confirm this chart has turned bullish.

Concurrent with a confirmed month end 12 sMA cross, ideally we would like to see an MACD bullish cross (we are close but not there yet) as well as a FORCE buy signal (we again are close but not there yet).

A reminder price can rise above the 12 sMA but it takes a closing price AT THE END OF THE MONTH above the 12 sMA to change this indicator to bullish. We need to wait for the end of July to confirm this one.


USD to SPX trading relationship past 6 months:



There are times in the market when certain asset classes move either in tandem or inverse to one another. The inverse movement of the USD vs. SPX has been a great indicator over the past year or so.

Note the inverse correlation on the chart above. Essentially in the current environment, as the USD move down:

-stocks move up
-foreign currencies (ex. Yen) move up
-precious metals move up
-commodities move up
-bond yields move up (US bond prices move down; foreign bond prices move up)

The dynamics of these moves are constantly changing but as of the past 6 months these general rules have applied.

The reason I bring this up is I think a critical thing to watch in the next 6 months is the direction of the USD. As such, I present the USD charts below.


U.S. Dollar Charts:


USD 10 year monthly:



My long term chart of the USD turned bearish at the end of May, 2009. All the technical indicators I use on the USD (with the exception of an MACD bearish cross) are pointing downwards.

The critical support level to watch on the monthly chart is 77.69. A monthly close below that level will be extremely bearish.


USD 3 year weekly:



The second long term chart turned bearish in early May. All technical indicators are bearish with the exception of a positive divergence on the MACD histogram (as indicated on the chart).

We had held a range bound level for 9 weeks that broke down this past week. Needless to say that is a bearish re-confirmation on the USD.

I have drawn a down trending channel that indicates possible support and resistance within the downtrend. The last discernible levels of possible support are 77.69-78.37 (Friday’s closing price 78.75). A break below these levels will be extremely bearish for the USD.


USD Point and Figure Traditional:



A reminder the PNF turned bearish on a price print of 82.00 and targets 71.00.


USD 2 year daily:



A 2 year daily view that shows the channel well defined. The 61.8% Fib at 77.93 and previous support at 77.85 has previously held support. Looks like we are going to test these levels once again.

For those who might be interested in a trade (non provident fund related), I think near these levels would be a great contrarian long USD play. The USD is universally hated and everyone thinks it is going to zero. There are very few that are looking for a rise in the USD. I am currently slightly short USD near term but near these levels I will play a long USD position (with a tight stop). When everyone in the boat is leaning one way..........look to go the opposite. Once again; where are the odds?


USD 1 year weekly:



A 1 year weekly chart shows cleanly the trading range we were in that broke to the downside. The channel is well defined.

As per above, on a contrarian short term play there is a good change the USD could rise to challenge the top trend line @ around 83-84.


USD 6 month daily:



Last chart is the 6 month USD daily I use as part of my trading indicators.

All the indicators went short term bearish on July 15 (as per my short term bullish SPX charts previous and as per my inverse correlation I discussed previous). Nothing new there.

What I am VERY concerned about is a subtle change in the direction of the 200 day simple moving average (green line). While most technicians use a price cross of the 200 day sMA as a bull/bear signal, many do not consider the actual direction of the 200 sMA. I have found in my studies over the years that this subtle change makes a world of difference between a "garden variety" bear/bull market indication and a "true" bear/bull market indication.

What this tells me is there is a very real chance the USD has entered what could be a very long and pronounced bear market. Short-medium term this is not an issue as the USD could rise from present levels (as discussed above) but it has to be considered for those who are looking long term. These indications combined with the weekly and monthly charts has me watching the USD as the #1 indication of where all markets go (given the movements of the other asset classes I discussed above).

Random thoughts:

The Head and Shoulders pattern many market technicians (including myself) were watching did not materialize as expected. Unlike many others, I was not hurt as a result because I took no long term positions in my provident fund based upon those signals and in my trading account I was short (as per the signals) with very tight stops that resulted in minimal losses (but for full disclose, I did suffer a minor loss. If you cannot stand to lose on occasion you cannot play this game).

Technical analysis is not a "crystal ball" (as those who sell stock market newsletters would have you believe). Equating my experiences as a pilot, I have said before that technical analysis is more like a "windsock" than a crystal ball in that it tells you the direction and velocity the wind is CURRENTLY blowing. A windsock does not tell you what the direction and/or velocity of the wind will be in future; only direction and speed at the time you make your last second decisions during the landing phase. Using TA as a "windsock" allows you to make the best possible decision you can but in the end you have to be able to react to a sudden shift in wind direction.

There are investment advisors who stick to a thesis that they are either "bullish" or "bearish" depending upon their personal preconceived perceptions of the market. In my mind this is foolish. If the wind changes........you change. Period. If a crosswind from the right becomes a crosswind from the left.......are you going to keep the same control inputs? Of course not. And if the market changes, are you going to keep the same investment thesis......in my mind........of course not. However, most investment advisors are not mentally "wired" to accept this sort of dynamic thinking. As pilots we develop professionally based upon exactly this sort of analytical thought process.

My "wiring" does not allow me to be either a “BULL” or a "BEAR" in any market, currency, or commodity. As I have said before, I am "married" to only one thing and that is my wife. I have never been compelled to be "married" to either a bullish nor bearish position on ANYTHING and will adjust as necessary. Given all I have seen in the past, I suspect this is a very rare trait so if you are using an "investment advisor" I would strongly implore you to always think along these lines when listening to their investment advice.


Bottom Line:


The markets have head faked almost everyone and gone for a moon-shot. They are looking bullish given the recent activity but have yet to confirm on my weekly and monthly charts they are bullish.

We are literally at the cusp of either a bullish breakout or a bearish decline. I cannot tell you tonight which will be the case.

I have not changed my Provident Fund positions. I am fully investment in my trading accounts with very tight stops (as indicated previous). I would again reiterate these are TRADING POSITIONS and not longer term investment positions (which I consider the Provident Fund to be and for which I provide guidance).

My personal "bias" is I believe this is a bear market rally. However, I do not ever let my personal bias enter into my investment decisions as bias tends to be more wrong than right. That is the reason why Technical Analysis works. It eliminates bias; you set your objectives and your parameters and you let the charts tell you what is going on.

In spite of all the doom and gloom out there......never forget the #1 rule. The market is a "voting machine". It is the collective wisdom/knowledge/fear/greed of trillions of dollars in "votes" with real dollars. You may not like "the guy" you are voting for but if the majority tells you that is who they side with.........you either fight against those trillions of dollars with your small investment portfolio or you side with them in spite of your personal "preference".

My positions remain unchanged as of tonight. Still in a 100% strategic cash position (actual values approx 13% equites/87% cash).

This next week will be a very important week. I will blog immediately any changes I make in my provident fund account.



**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).


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

dwaynemalone1@gmail.com

Stockmarket and USD update 11 July 2009

Welcome to the latest installment of ECAM.

I want to start by extending a warm welcome to the many new members who have joined the site over the past 2 months. Also thanks to those of you who have sent me emails over the past few months with the positive feedback. I'm pleased to see the site has been of benefit to many of you and look forward to providing future contributions. I would welcome all current members who feel this site is of benefit to pass it along to those who you feel might benefit from the analysis.

As I spoke about in my previous blog entries, I have been anticipating a pullback from the run up in the markets from the March, 2009 bottom. The bounce off that level was strictly an oversold correction to the present long term bear market that began in Oct, 2007. These bear market rallies are present in every bear market and only serve to take money out of the pockets of naive individual investors and put it into the pockets of the investment banks and broker dealers. That is not to say you cannot play these rallies but it is extremely important to understand that you are going "counter-trend" to the current market environment and, unless you recognize this (and trade accordingly), any long term capital you put into equates in this environment is bound to result in a loss if you apply a "buy and hold" strategy.

Just to refresh everyone's memory (or for those who are not familiar with the concept under which I invest), you must understand that the "buy and hold" mantra was developed by the mutual fund industry many years ago for one purpose, and that is to serve the mutual fund industry.

A mutual fund company makes its money based upon the fees it can charge you to "manage" your account (known as a Management Expense Ratio or MER for short). The fees they can charge are much less for a money market fund than they are for a bond fund, and again much less for a bond fund than they are for an equity fund. It is in their best interest to keep you in equity funds as long as they can (and as much as they can) so they can reap the greatest management fees on your account.

They justify their position by referring to the age old Wall Street mantra that "it is impossible to time the markets". That is not true and I (as well as thousands of others) have been doing it for years.

It is important to define the 2 main types of investment advisors. They can broadly be categorized as either "Relative Performance" advisors or "Absolute Performance" advisors.

The first is known as a Relative Performance advisor (your typical mutual fund company or investment advisor). Essentially what this type of advisor does is define the specific market index they intend to "benchmark" themselves against and then make small adjustments to their (your) portfolio holdings in an attempt to beat the index. If they outperform the index (even fractionally) they will quantify that as a successful "outperformance".

The problem with this is if the index has fallen 40% in the past year and their fund (your portfolio) has fallen by only 39%, they would tell you they have been successful in managing your funds because they "outperformed" the market by 1%. In my mind that is not success but that is the way most people invest the majority of their portfolios.

Because the majority of the money mutual fund companies make is on equities under management, most will NEVER hold more than a very small portion of your portfolio in cash as it does not serve THEIR best interest. In other words, even when it is obvious to everyone the market is sinking (on the basis of both fundamental and technical analysis); they will continue to have 100% of YOUR money exposed to the market so they can collect their MER fees.

The second type of advisor is known as an "Absolute Performance" advisor. This type of advisor uses a combination of hedging strategies, position timing and market shorting techniques to attempt to provide an absolute rate of return irrespective of market conditions. Thus it is possible to make a positive return even in a down trending market.

The most well known of this type of advisor is the hedge fund. Hedge funds have gotten a bad reputation over the past few years due to their aggressive use of over-leverage and outrageous fees (the typical hedge fund charges 2%/year upfront and 20% of any winning positions). Not withstanding the "politics" of hedge funds, they manner under which they operate (absolute performance) provides the greatest opportunity to increase the value of your portfolio over time.

To my mind that is the key to investment and essentially I am my own hedge fund. I want to see yearly gains in my portfolio balance irrespective of market conditions or, at the very least, be positioned in cash as the market goes into freefall to preserve my investment capital. This is only available through market timing and use of cahs and/or short positions in my trading account.

Unfortunately shorting the market is not an option in our Provident Fund so the best we can do is be in the right asset class (stocks, bonds, and cash) at the right time. That is what I attempt to provide to you on this site.

OK, enough of that! On to the markets (click on charts to enlarge):


S & P 500 Index Charts:


SPX Seasonal Performance chart:



Once again, here is the season performance chart of the SPX from 1950-2009. We are currently in the "summer doldrums" where prices tend to drift slightly upwards from their bottom in June to their top in August. It is a seasonally "neutral" period which proceeds the worst 2 months of the year; September and October.

You cannot use this chart to position trade but it is important to keep in mind where the mine fields might appear. I will be very cautious going into September (especially this year as I spoke about in my last stock market blog entry).


SPX 10 year monthly chart:



A reminder we are in a cyclical bear market that began when price closed below the 12 month simple moving average (blue line) in Dec, 2007.

On an inter-month basis, price may climb above the line but the defining point is the last day of each trading month. We are still below the line so this chart is BEARISH.


SPX 3 year weekly chart:



The second chart in our "dynamic duo" of mid to long term position trading.

This chart signaled the start of the bear market in Dec, 2007 when the 13 week exponential moving average (blue line) crossed below the 34 week exponential moving average (red line).

Over the past 2 months price rose to the point where the 2 lines began to converge but there has yet to be a crossover. During the last bear market this convergence occurred on numerous occasions but the bear market was not over until these lines crossed.

This chart remains BEARISH.


SPX 1 year daily chart:



This 1 year daily chart is a new one I am presenting on the blog.

Technical analysis is always a function of momentum confirming price. It is not a crystal ball and cannot tell the future. However, there are certain patterns that have a reasonable history of "foretelling the future". This chart has 2 such interesting patterns.

The pattern is known as a "Head and Shoulders" pattern. It can indicate a topping pattern or, if it is upside down, it can indicate a bottoming pattern.

On this chart we have a H&S topping pattern (in red) that confirmed this week when price closed below the "neckline" (NL) of the pattern. Based upon the "rules" of this pattern, the price projection is obtained by taking the distance between the head and the neckline and projecting it downwards from the point of break of the neckline. In this case the pattern projects to 810-820.

It is interesting to note the Fibonacci 50% retracement level from this current bear market rally is at 811. Thus, we can reasonable expect price to fall to around the 800-820 level given these patterns.

If/when this occurs, we may have set up an "inverted head and shoulders" pattern (shown in green). The same rules apply only in reverse. Price would form the right shoulder and then if price began to climb again (and break the neckline at 950), we could project a price objective of 1234.

Putting this all together, the "technical analysis" crystal ball calls for a drop to the 810 area followed by a rise to 1234 to complete both the patterns.

It is important to note this is not something that happens without fail and it would be unwise to trade just upon this pattern but if the patterns materialize over the next few weeks/months, that is the sort of levels we could be looking at.


SPX Point and Figure Traditional chart:



The PNF chart is bearish and points to a projected price target based upon the structure of the chart of 805. Another interesting number as it comes right in the 800-820 area I discussed above.


SPX Ichimoku chart:



Sell signal occurred on a break of the red line June 16. Sell signal confirmed by a cross of the blue below the red line on June 25.

Price is currently in the "cloud" of support and the down trending channel is clearly defined. Price held the support level of 877.86 the past 3 days. If it breaks this on a closing basis it is reasonable to assume a significant decline will begin.


SPX 6 month daily chart:



My daily trading chart showing the indicators I use to trade on a more short term basis. I went short the market on June 16 and am currently holding the majority of my trading positions short with stops near the Bollinger Band midpoint at 910.


SPX 60 minute 10 month chart:



I included this chart only to show the important support level at 875 and resistance level at 950. A significant break below 875 will bring on large amounts of selling; this level is being defended by the bulls at all costs.


U.S. Dollar Charts:

As I spoke about in my last currency blog, the USD is bearish in the longer term charts. They have not changed in any way over the past 3 weeks so I have not included them in this analysis.


USD 6 month daily chart:



In my last currency entry, I said it looked like the USD was setting up for a short term bullish push. At the time I said it looked like the 82.63-82.67 was a reasonable target for the move.

It looks more and more like this bullish move may be unlikely as time decay has allowed the upper trend line to descend below the target I set at that time. That is not to say that it cannot happen, but the likelihood of that happening has now diminished.

Since that time the USD has entered a very tight trading range. It appears to be forming a bearish pennant as shown on the chart. My technical trading indicators are neutral with a slight downwards bias.

If this chart breaks down and the USD breaks downwards out of the pennant, the projected price base upon the pattern would be 71.00'ish. This would take us back down to the all time lows in the USD.


USD PNF .10 box chart:



The .10 box PNF nicely shows the tight range the USD has been in for the past 7 weeks. The chart is currently bearish and projects a price target of 78.50.


USD PNF Traditional chart:



The PNF traditional chart is bearish and projects a price target of 71.00 (just as a break of the pennant pattern I discussed above does). Support is at 78.00 but there is very little chart resistance all the way back down to the bottom if it breaks.


USD 1 year weekly chart:



The 1 year weekly chart shows the tight trading range the USD has been in the past 7 weeks. A weekly closing price >80.80 would be bullish; a weekly closing price <79.34 size="5">Bottom Line:

There are no changes as of today to my Provident Fund positions. Still approx 12% equities and 88% U.S dollar.

I am concerned about the USD but as of today it is still neutral and there is no clear defined direction in the short term. A break down of the USD will be bullish for stocks, precious metals, commodities and foreign currencies (other than Yen). A break out of the USD will be the opposite. Until it makes its move, any positions are somewhat speculative.

I will continue to hold my present positions until the picture becomes clearer. I will blog any changes I make immediately.



**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).


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility. The author is not licensed as an investment advisor in the UAE and therefore cannot provide individual account advice to individuals and/or institutions.

dwaynemalone1@gmail.com