Stock Market and U.S. Dollar Update 27 February 2010

A general market update as of market close on 26 Feb 2010.

It has been some time since my last update (published 19 January 2010). At that time I indicated many of my proprietary indicators (which I normally do not disclose and use as part of my non-EK portfolio investment decisions) had issued a preliminary sell signal.

The markets went on to correct around 10% to the downside over the next several weeks before finding a bottom the 1st week of February. Since then the markets have rebounded somewhat but remain vulnerable to further downside.

The first chart is an overview of current market trends. Overall most markets are showing positive strength in the short time frames but neutral readings in the intermediate time frames.

Click on all charts to enlarge:

Market Trend Chart:



It is interesting to note there appears to be a change in market structure with respect to the inverse USD to stock market relationship that has existed for the past year. The strength of the USD over the past few months has not led to a corresponding drop in markets (as it had in the past).

In addition, it is unusual to have US bond prices showing strength at the same time the stock markets are showing strength (they "usually" move inverse to one another as investors adjust portfolio's to choose between either equity or bond positions).

In currencies, the USD index has been very strong (primarily as a result of Euro weakness associated with the current Greek debt situation). The "commodity" currencies (Canadian and Australian dollars) have remained relatively strong in spite of the strong move in the USD. This is another anomaly as commodity prices in general have been in a neutral-to-down trend the past month (so by extension the XAD and CDW should also be trending downwards).

All these are crosscurrents within the markets at present that need to be watched closely.


SPX 6 month daily:



The SPX 6 month daily chart shows the decline from late January to early February and the market rebound since that time.

Price has moved into the upper regions of the Bollinger bands but remains below the 50 day moving average (blue line @ 1108.65). The stochastic is overbought (>80) so short term some downside could be expected. All the other indicators look good.

As such, short term the market remains bullish.


SPX daily (volumetric):



The SPX daily volumetric chart from the Mar, 2009 market bottom shows the strong volumetric support and resistance levels.

The market is currently trapped within this 1070-1115 range and it will take considerable buying or selling pressure to move it out of this range. Any movement out of this range needs to be respected. A break above 1115 and the next target would be 1150'ish. A break below 1070 and the next target would be 1030'ish.


SPX PnF Traditional:



The point and figure chart has not budged over the past few months in spite of the market action. It went on a buy signal in July, 2009 when price advanced above 935. It remains bullish and still targets 1295.


SPX 3 year weekly:



The 3 year weekly chart has been interesting. It turned bearish in late January and exhibited all the signs of a coming market decline. However, it has since reversed and is currently moderately constructive.

Key positive notes:

-the RSI has remained > 50 during the current decline,

-price fell but held above the 100 week moving average along with remaining above the trend line from the 2007 top (known in technical terms as a "back test" of the trend line),

-price has since recovered and is currently above the Bollinger band mid point, and

-volume during the decline was strong but not overly so. It was about "average" for all the declines since the March, 2009 bottom. This can be considered a positive sign as institutions are not bailing out of their current positions totally.....BUT...

Key negative notes:

-several key technical indicators are still on "sell" signals (SAR, Full Stochastic, MACD, Force index and On Balance Volume indicator), and

-the volume on the 2 weeks of buying since the decline was anemic. This indicates institutions are not strongly buying this current market correction either.


Putting it all together and the intermediate term outlook is neutral.


SPX 11 year monthly:



Having said the above, it is interesting to note the monthly trend remains positive. Price continues to remain above the 12 month simple moving average (currently at 999.97 and rising) with the Stochastic, MACD, RSI, and Force index all remaining positive. The ADX has yet to cross so that is the only negative on the chart.

Price has retraced 50% of the market losses experienced from Oct, 2007 to Mar, 2009. This is a common Fibonacci retracement level where price pauses before either continuing to advance upwards or begin to reverse back to the downside.

During the 2003-2004 period price remained within the 38.2% and 50% Fibonacci levels and consolidated for 10 months before advancing upwards. It did so when the 12 month SMA reached the consolidation price range and eventually forced price out of the consolidation area in an upwards direction.

It is reasonable to expect a similar type of market action could happen again. As such, price can be expected to remain within 1041-1121 over the long term until the 12 month SMA advances into this range.

The long term outlook remains bullish.


USD 6 month daily:



Nice short term view of the US dollar since the Nov, 2009 bottom.

Price rose from 74 to 78 before retracing back to 76 in mid Dec-mid Jan. This set up a bullish flag (annotated on the chart) with a price target on breakout of around 82. This level has almost been achieved.

Price has consolidated the past few sessions but remained above key support at 79.51. A break of this level would be a very bearish reversal should it occur.

All short term technical indicators are positive.

As long as price remains above support the USD short term is bullish.


USD 3 year weekly:



The intermediate view of the USD looks strong as well. All intermediate technical indicators are positive. The Stochastic is overbought but can remain at extremes for long periods of time (as it did as an oversold condition for months).

The USD has reached a very important resistance level as can be seen on the chart. This level (around 80.39) is a very important resistance level on both the weekly and monthly charts. It would be expected for the USD to consolidate at current levels before attempting to break above this level.

Intermediate term the USD is bullish.


USD 10 year monthly:



Long term view of the USD is very interesting. Price closed the month of Feb above the 12 month simple moving average (blue line @ 79.31). As such, from a long term viewpoint the USD is now positive.

The USD has come up to a very strong level of resistance @ 80.39 (as shown on the chart). Key support is now @ 77.69. I would expect price to remain within this range for some time to digest the current advance but otherwise the technical’s long term look very good.

The USD is long term bullish.


Bottom Line:

The markets corrected as my indicators indicated they would short term and have rebounded from their recent bottoms. The intermediate term looks undecided with the long term still positive.

Until all 3 time frames are back into alignment it would be unwise to add to current positions. The markets feel "heavy" at current levels and price is not exhibiting any strong energy to advance. As such, the markets are vulnerable to remaining in a trading range from current levels.

Until 1115 can be breached to the upside, I expect a sideways choppy market within 1070-1115.

A break above 1115 would target 1150 and be bullish. I would consider adding to my current positions on a break of this level.

A break below 1070 would target a return to the previous low of 1044.50. A move below 1044.50 would set up a "lower high, lower low" downtrend pattern. Should this happen I would move my holdings back into 100% cash in anticipation of a new downtrend developing over the medium-to-long term.

As of today my strategic positioning within the Emirates Provident Fund A and B accounts remains unchanged at a 50% Equity/50% USD cash position.**

The ECAM Asset Allocation Fund is currently 50% invested (40% core holdings invested + 10% discretionary invested) and 50% cash. I will blog those charts separate.

**Strategic allocated percentages are as per how funds were originally allotted. Due to daily market fluctuations and ongoing equity monthly purchases within the accounts these amounts will vary several percent from that posted.

Current positions as of 26 Feb 2009:

-Equities: 56.1%

-Cash: 43.9%

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dwaynemalone1@gmail.com