Stock Market Update 09 July 2011

From my previous post dated 12 June 2011:

Over the past 6 weeks the market has experienced a decline of approximately 7%. This type of decline is typical of a pullback during a bull market advance so it is premature to conclude we have commenced a new bear market.

During the past 2 pullbacks in this bull market there were declines of 17% and 7% respectively (Apr-Jun 2010 17%, Feb-Mar 2011 7%). However, several of my "fear" gauges are showing an abnormal amount of fear amongst retail investors (who are traditionally the worst at picking "tops" and "bottoms") during this relatively minor pullback. As such, at this point I am still bullish (more so now that we have a decent correction finally underway to reduce the excessive optimism in the markets) and am looking to add to positions when this current correction is past.

It was interesting to note the bottom of the correction occurred Thursday the following week (16 June) followed by a wicked 2 week advance to our current levels.

It is ironic the impetus for the advance was the "remedy" of the problems in Greece whereas everyone knows none of the problems have gone away; they have merely been swept under the rug to re-emerge at a future date.  However, algorithmic computer trading does not know logic; it trades what it sees.  And since approximately 90%+ of the current volume in the S&P 500 futures is computer driven algorithmic and hedge fund trading; today we see the result.

I was hopeful to see a much greater correction (15%+) to what we saw so I have yet to change my allocations within the provident fund.  The reasons for that will become clear below.

Click on all charts to enlarge:


SPX 60 Minute Chart:

S&P 500 60 Minute

The first chart is a long term 60 minute chart of the S&P 500 index.  As can be seen, a nicely established trend channel from Sept 2010 was broken to the downside in late May 2011.  That was the correction I spoke about in my last blog post.

It was essential during the decline 1249 was not taken out as it would have led to a much greater decline than was experienced.  The correction ended at 1258 and then our rapid 2 week advance took us back to 1356.

This action has formed what appears to be a "textbook" Head and Shoulders topping pattern.  The symmetry is nearly perfect and the time between the Head and the Shoulders is ideal.  The neckline (shown as the red line) is the trigger should we continue to decline from here.

The length of the pattern from the Head to the neckline is approximately 124 points; on a break of the neckline the price objective would be 124 points below the breakpoint of the neckline.  Will we get there; too early to tell.  But it does bear watching (for other reasons I will explain below).

Currently the short term 60 minute chart is bullish.


SPX Daily Chart:

S&P 500 Daily

The daily chart shows the wicked rise off the 1258 low.  Currently the chart is on a buy signal having held above the 200 day moving average on the last decline (green line @ 1272) and currently above the 50 day moving average (blue line @ 1317).

The current advance appears to be a 5 wave advance with waves 1-3 completed and currently in a wave 4 decline.  It could be expected wave 4 would correct near to the 50 dma before a 5 wave advance to finish the pattern.  I would expect that push to equal the top @ 1370 should it materialize.  If it exceeded 1370 that would remove the possible Head and Shoulders pattern off the table (as discussed previous).

Currently the short term daily chart is bullish.


SPX Weekly Chart:

S&P 500 Weekly

The weekly chart shows the sell signal late May and the subsequent possible buy signal last week.  All the technical indicators have turned bullish again with the exception of the MACD.  Since I insist upon all the indicators being in alignment, this chart is still bearish awaiting an MACD cross to return to bullish.  As such, it could be described as "neutral".

It appears we continue to remain within a bearish rising wedge off the 666 low in Mar, 2009.  Any weekly close below the lower trend line would have to be taken as a serious indication the bear market decline had begun.  Too early to count our chickens but watching that trend line closely.

The current intermediate term chart is neutral.


SPX Monthly Chart:

S&P 500 Index Monthly

The monthly chart remains bullish.  All technical indicators remain on a buy signal.

The long term chart remains bullish.


SPX Weekly Elliott Wave Chart:

I've been doing some work on Elliott wave associated with this advance the past few days.  This weekly chart shows a general view of the pattern that has unfolded since the 666 bottom in Mar, 2009.

Elliott wave analysis can be quite complex so I do not want to go into too deep of an analysis.  I use this to illustrate that we are still within the cyclical bull market coinciding within the secular bear market.

In Elliott wave analysis there are generally 2 possible outcomes; a "Primary" count and an "Alternate" count.  Both are presented on the chart above.

As price has unfolded over this advance, the Primary count is shown in blue and pink.  Normally in a bull market advance the pattern should take the form of a 5 primary wave advance (primary waves 1,3,5 upward waves; primary waves 2,4 corrective down waves) shown in blue.  Each of the primary waves will consist of a 5 wave major wave pattern shown in pink . 

I've shown on the chart the current "best fit" count.  It shows we are in Primary wave 3 UP and are working on Major wave 3 UP.  As such, the bull market still has some distance to run before we reach a top.

Having said that, there is always an "alternative" count.  The alternative count is a low probability count but one I continue to have on my radar screen.  It is possible we could be within an a-b-c correction off the Oct 2007 top @ 1576.  If this pattern were to transpire it would result in an SPX target of 460.

The problem with the count is one would have expected the "c" wave to begin at either the 50% SPX 1121 or 61.8% (SPX 1228) Fibonacci levels.  This of course did not occur as we have continued higher.  Having said that, there is still the remote possibility we could top at the 78.6% (SPX 1381) Fibonacci level (not a normal place to do so but not out of the question).  As our last advance topped out at 1370; this could be considered "close enough" to keep this count in play.

In order to keep our primary count bull market advance, during any correction wave 4 cannot drop below the wave 1 top (as shown on the "rules" on the chart).  The wave 1 advance topped @ 1219.  It is interesting to come back to the Head and Shoulders I mentioned previous.  Should it play out "textbook" a decline below the neckline would target a 124 point SPX drop.  Assuming the neckline is near current levels (1260'ish) this would put a possible decline down to a target of 1136 (1260 - 124 = 1136).  This of course would be below the wave 1 high of 1219; thereby eliminating the bullish count as being the primary count and putting the a-b-c decline down to 460 on the table.

Food for thought.


Euro Daily Chart:

Euro Daily chart

The last chart is a daily chart of the euro.

Note the euro is currently established in a triangle pattern.  This is an area of indecision where the outcome could go either way.  However, given the pattern is establishing off a high in the euro, it would be expected the resolution to the triangle would be a break downwards.

Given the SPX correlation to the Euro (currently 0.46 correlation) should the euro break this triangle to the downside we would expect the equity markets to follow to the downside.


Bottom Line:

-My short term technical indicators are currently bullish with the intermediate neutral and long term indicators bullish.

-We are currently in the annual “weak period” stock market cycle period between May and October but remain within bullish year 3 of the 4 year Presidential cycle.

-A potentially dangerous topping pattern may be forming on the SPX with dire Elliott Wave implications if completed.

-Equities are not "cheap" at this level based upon historic valuations.

Given the above, it is still too risky (IMHO) to commit additional investment capital into equities within the Provident Fund.  In addition, the difficulty in reversing a bad commitment in a timely manner makes it more so.

If the market had given us a decent correction I would be more inclined to add to current positons.  It did not do so therefore I will continue to hold my current positions.

Seasonally we are in the summer period where markets move rapidly on little volume.  They traditionally drift sideways to slightly up in June/July followed by a correction mid-Aug into late Sept/early Oct.  That is what I expect may happen but will use my technical indictors to guide me.


Emirates Provident Fund:

As of Friday, 08 July 2011 I remain in a strategic 50% equities/50% USD cash weighting as follows:**


-BlackRock US Dollar Cash Portfolio Fund: 50%

-Russell Global 90 Fund: 15%

-Fidelity International Fund: 10%

-BlackRock Managed Equity Fund: 25%


**Actual positions will change daily based upon price action and market volatility.



ECAM Asset Allocation Fund:

The ECAM Asset Allocation Fund is currently 63% invested with a 37% cash reserve as follows:

-Stock Equities 20% vs model 40% (50% model weightings)
-Bonds 15% vs model 15% (100% model weightings)
-Real Estate 15% vs model 15% (100% model weightings)
-Commodities 8.75% vs model 20% (43.75% model weightings)


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