Stockmarket update 02 December 2009

Another interesting few weeks in the markets.

Of course the big news last week was Dubai World and it's notice of a possible planned default on it's Nakheel bond repayment due mid December. The markets had a few rough days following the announcement but seem to have shaken off the event.

The message they are giving is that currently the markets do not believe there will be a follow-on contagion effect that spreads to other weak countries/markets. There are many such markets that are on very shaky ground and it would not take much to push at least one of them over (mostly Eastern European countries but also something as big as Japan could follow suit in a domino-style collapse).

Having said all the above, the markets are still in a cyclical bull market within a secular bear market. Everything is pointing up (as of today) but every day I look at my charts I say to myself "is this the top"/"is this the turn"/"where do I plan to exit when this finally turns down again".

Riding this bull is a risky venture; profitable but risky. It is sort of like riding a real bull (not that I have actually done this but can imagine what it is like)......you don't know the bulls nature, you only know he does not want you on his back and and will do his best to throw you off and try and kill you. You need to ride the bull but know when it is time to jump off before you get killed.


On to the charts (click all charts to enlarge):


Stockmarket


SPX 11 year monthly:



First chart is the S and P 500 Index monthly chart. This chart is the first of 2 medium to long term charts I use. It turned bullish in July as noted on the chart.

The uptrend is intact but note price has risen very close to the 50% Fibonacci retracement level near 1121.44. This is the most common area where a cyclical bull market would reverse course and recommence it's decline so it is necessary to pay close attention to price at this level.

Should price rise above the 50% level the next target would be the 61.8% level at 1228.

As of today this long term chart is bullish.


SPX 2 year weekly:



The second of my intermediate to long term investment charts. This chart turned bullish in late March as shown on the chart. This was confirmed by the 13/34 exponential moving average crossover in late July.

All indicators on the chart remain bullish but note price has risen to the critical level as defined by:

-the 50% Fibonacci level (as discussed previous)
-the last area of fairly strong volumetric resistance at 1120
-the apex of what appears to be a bearish wedge pattern
-the bottom of the downtrend line from the market top in 2007

The confluence of these conditions have held price in a tight range the past 2 weeks. The market needs to decide if it wants to go up from here (taking out the levels mentioned) or commence a breakdown. It is impossible to guess which will happen so we need to let the markets tell us which way they want to go.

Should price be able to break above it's current range, it appears there is very little resistance to at least 1200.

As of today this intermediate to long term chart is bullish.


SPX 6 month daily:



The 6 month daily chart shows what appears to be a well defined channel (in dotted red). Price is still established in a "higher high/higher low" pattern so the uptrend is still intact. It would take a close below 1029.38 to change the pattern.

I have drawn (in black) a pattern on the chart known as a bull flag. A bull flag pattern appears when price has a strong advance and then sets up a trading range while it digests it's recent run (in the process working off overbought conditions as can be seen by the Stochastic moving from well above 80 down to the 50'ish level currently). The pattern takes the shape of a "flag staff" and the "flag" itself.

Normally this pattern is quite reliable and should break to the upside. If this were the case the expected target on the advance is calculated by taking the length of the "staff" and adding it to the point of breakout. 1113 - 1029 = 84 points. On a break above 1113 we would add 84 and arrive at a target of 1197. Note this level is very close to the 1200 level I mentioned previous.

The MACD continues to produce a divergence so this is a bit worrying. I would like to see the MACD break above the downtrend line to give greater confidence all is well.

As of today the short term chart is bullish.


SPX Point and Figure:



The SPX Point and Figure chart turned bullish in July on a price print of 935. It remains bullish and has a target price based upon the structure of the chart of 1295.


SPX 15 Minute:



I have included a very short term 15 minute chart to give you some idea of the price action the past few days.

Price entered the current consolidation range on Nov 9 and has moved no where since. A break above the current range would be bullish; a break below bearish.


Warning Signs


Having said all the bullish above, there are 2 things I am watching closely that give me considerable pause.

Generally in the stockmarket the "leaders" tend to be Financials and Technology. These 2 tend to pull the general market up and they tend to pull the general market down.

I have represented the Financials by way of the Financial Select SPDR ETF and Technology by way of the Philadelphia Semiconductor Index:


XLF 6 month daily:



XLF 3 year weekly:



The financials are looking weak. The short term chart signalled a sell signal several days ago and price appears to be forming a possible descending channel.

The weekly chart is very close to a sell signal. A closing price below the Bollinger Band midpoint along with confirmation on my technical indicators would confirm an intermediate bearish trend had begun. Note that we are not there yet but we are close.


SOX 6 month daily:



SOX 3 year weekly:



Technology is showing similar weakness. A similar short term down trending channel appears to have formed and the weekly is in a similar position to the Financials.

Should these 2 move into a bearish reversal it will be next to impossible for the general markets to sustain their uptrend. I am watching these closely.



U.S. Dollar


USD 3 year weekly:



I have included three USD charts today. The first is the 3 year weekly chart. This chart turned bearish in mid-April 2009.

The decline has been incredibly linear; continuous lower levels week after week after week. A very unusual pattern; in fact I have NEVER seen a weekly stochastic remain in the oversold area for a full 6 months ON ANYTHING.

Note the RSI is still not in oversold territory so, believe it or not, it is possible the USD could decline further before a meaningful retracement upwards. Having said that, the pattern on the chart is a falling bullish wedge that should break upwards. When.......who knows. What I do know is there are a ton of market players short the USD and a ton of market players using the USD as their "carry trade" currency; when it does turn (and it will at some point) there will be a mad rush to cover short positions. This will result in a rocket ride north for the USD. I suspect the "unwind" to be very volatile.

The price is currently sitting right on top of 2 support lines that form essentially 1 level of support at 74.31-74.48. A minor support at 73.89 is below this. Should these levels break I think there is a very good chance we go back down to test the all time low at 70.70.

As of today the USD long term still looks bearish.


USD 6 month daily:



The USD daily chart shows the wedge pattern. The price level of 74.94 was decisively broken last week so we can expect in the short term there will be more USD weakness.

Note the Bollinger Band midpoint has acted as a barrier during this decline. It currently sits at 75.22 and until price can break above this level......down the USD goes.

As of today the short term USD chart is bearish.


USD Point and Figure:



The USD Point and Figure chart turned bearish in May, 2009 on a price print of 82. It currently projects a bearish price target of 63 based upon the structure of the chart.


Gold


Gold 3 year weekly:



Gold continues to power ahead. The inverted Head and Shoulders pattern I discussed previous is still in play and my long term target is 1333.

I have also included my latest Fibonacci extension target as shown on the chart (1245). That is the current short term target on this momentous movement.

Gold is severely overbought and this appears to be a blow off. The RSI has reached an extreme level of overbought as it did in Oct, 2007 and Feb, 2008. The Oct/07 correction was mild (approx $70 decline) while the Feb/08 correction was more substantial (approx $200). There is no way to tell how big the next correction will be but there is NO WAY I would be a buyer of bullion at this point in time.

In fact, while I have said I would never sell my current holdings, I am now toying with the idea of doing so given the profits I have in the position. If I don't I will probably buy downside insurance protection via options (puts on GLD).


Bottom Line:

The markets continue to exhibit strength. The well defined support and resistance levels on the SPX are clear indicators there is a fight between bulls and bears at this point.

At this point I am still a "nervous" short-to-intermediate term bull. However I am still a bear long term. I would prefer to see an orderly market decline to the 1060'ish level to work off some overbought conditions and reduce the bullish sentiment currently in the market; that would ultimately be good for the markets at this point. However, we may not get that and we may just continue further up from here.

A break above 1113 and the uptrend continues. Next reasonable target 1200'ish.


As of today my strategic position within the Provident Fund remains unchanged at a 50% Equity/50% USD cash position.**

The ECAM Asset Allocation Fund remains 100% invested.

**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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