Stock market update 27 August 2011

Another week of "wait and see" on the markets.  Large daily price swings continue to dominate the equity markets with little decided in the "big picture".


As it is near the end of the month my monthly charts become valid.  As such, I will start with a top-down review in this post.


Click on all charts to enlarge:


SPX monthly charts:

SPX 10 year monthly

The first chart is the standard monthly chart of the SPX.

Unless there is a miraculous recovery in the next few days (a close > 1266.70) it must be assumed the SPX will close the month of August below it's 12 month simple moving average.

As subscribers know, the monthly and weekly charts are the two I use to determine equity asset allocation.  When both are in bullish agreement, I am normally fully invested.  When one is bullish/one bearish I am normally in a 50% equity/50% cash position.  When both are bearish I am normally in a 100% cash position.

Once again, a close below the 12 mSMA does not unto itself justify a bearish ranking.  There must be technical indicators to corroborate the price indications to avoid unnecessary whipsaws in the signals.

As can be seen on the chart, currently there are 6 indicators bearish:

-RSI < 50 (but not yet below the May, 2010 head-fake)
-SAR
-12 month SMA (but not yet below the May open @ 1186)
-ADX
-Force (but not yet below the May, 2010 head-fake)
-Stoch-RSI

Also there are still 2 indicators bullish:

-Full Stochastic >50
-MACD yet to cross over

I am currently leaning heavily bearish currently but those 2 bullish indicators (and 2 bearish indicators still above the May, 2010 lows) still bother me.  As such, I will give the market a few more days for the market to show it's hand (more on that strategy in my next blog post).

SPX monthly 2 year

The monthly chart blown up shows clearly the strong area of support from Apr/May and Oct/Nov/Dec 2010.  This area is between 1180-1189.

A monthly close on the SPX for August below 1180 would be another good confirmation we have entered a bear market.  We closed Friday @ 1176.80 with 3 more trading days to go in August.

SPX weekly chart:

SPX weekly chart

For the week the SPX closed up 4.74%.

The weekly chart remains bearish from late July with all technical indicators remaining bearish.

Price continues to hold the weekly support shown on the chart @ 1120.  A break below 1120 and the 38.2% Fib @ 1101.73 and the next target low will be the support and 50% Fib collocated @ 1019.

SPX daily chart:

SPX daily chart

The daily chart remains bearish with all technical indictors in agreement.

Bullish positive divergence on the RSI and Force indicates the strong bearish push we experienced the past few weeks has ended and we are in a position to advance upwards from this point.

I have drawn a consolidation box clearly showing our back and forth price action the past 15 trading sessions (3 weeks) between 1120-1208.  We have gone no where since my "Wait" blog 12 August.  Those who panic-sold at those levels are wondering today whether that was the right move.  It was not.

Another day of positive price action on Monday would turn the daily chart bullish.  Price needs to break above the upper boundary of the box in order to set up a "higher low/higher high" price trend.  Until then, we remain range bound between 1120-1208.

SPX 60 minute charts:

SPX 60 minute chart

The 60 minute chart turned bullish several days ago.

It appears to be forming a symmetrical triangle pattern.  A break below the pattern would be exceptionally bearish with a target 130 points below the breakdown point (approximately 1010).  Alternately, a break above would target an additional 130 point to the upside.  Since the pattern was entered from above, 2/3 of the time the exit will be in the same direction as the trend (i.e. down)

This pattern needs to be watched closely in the next few days.

SPX 60 minute

A close up view of the 60 minute shows a possible rising channel leading out of the upper trend line of the triangle mentioned previous.  This would be encouraging and a break above 1208 would be really bullish.

Not there yet!

Key indicators to watch the next few weeks

Many traders/investors center their attention on the equity charts without considering the other investment vehicles which sometimes give clues as to the future direction of stocks. 

Here are a few I am monitoring:

U.S. Dollar:

US Dollar

The USD has been in an extraordinarily tight price range since early May 2011 between 73.50 and 76.00 (shown by the consolidation box).

Price remains below the 50 day moving average and the associated technical indicators remain bearish.  As such, there is a reasonable likelihood price will eventually break below the bottom of the box.  This would be bullish for equities given their current inverse correlation to the USD.

Alternately, should price miraculously break above the upper resistance line of the box, this would be very bearish for equities.  Watch the box for clues:

-USD < 73.50 = bullish for stocks,

-USD > 76.00 = bearish for stocks

Gold:

Gold daily chart

A lot of hedge fund hot money has gone into gold over the past 6 months.  Should gold break down those funds will flee to other asset classes (such as stocks).  As such, gold needs to be monitored for clues.

Price was WAY OVERBOUGHT on gold the past few weeks (as shown on the chart).  In fact, late last week I had a naive young Thai cabin crew member tell me she was buying more gold as she explained to me that "GOLD NEVER GOES DOWN".  It was at that point I highly recommended she sell her gold positions.  She looked at me like I'd come from another planet.

Subsequently we had the huge fall in gold this week.  Tuesday/Wednesday saw a loss of over $200/oz before a recovery on Thursday/Friday.  Looks like the crazy price swings in the equity markets are now moving over to the gold markets.

Technically the price chart on gold remains bullish.  Price dramatically broke but held support lows at the 50% Fib @ 1698.46 (low last week was 1705.40).

In spite of the drop, all the technical indicators on the daily chart remained bullish.  Excellent closing price support was found at the intersection of the 38.2% Fib, the up trend line and the support level @ 1750.  This was a very good entry point for my gold-loving cabin crew; hope she jumped on it!

Price needs to hold above the trend line/1750 price level.  A daily break below and the next support is not until approximately 1650-1660.

A break below 1750 and I suspect hot money will flood out of the gold market; I suspect a good portion of that hot money will flow into the equity markets.  Alternately, continued bullish price action in gold will act as an alternate to equities.

U.S. Government Bonds:

10 Year US Treasuy

A good place to look for clues as to where the equity markets are going is found in the bond market.

Money has been flocking to US bonds (in spite of the AAA downgrade) as a safe haven from equities.  If we should see money leaving bonds, there is a very good chance most of it will go back into equities.

Last week the 10 year US Bond hit $130.07; a price level not seen since the stock market meltdown lows back in 2009.  Since then price has formed it's own consolidation box as shown.

A break below 128.46 and money should start to flow out of bonds and back to stocks.

US 10 year yield

A close up look at the yield on the 10 year treasury provides some interesting clues.

As noted on the bond price, the yield has entered a consolidation box.  The low last Thursday @ 1.978% was the lowest yield EVER on the US 10 year (below the 2008/2009 meltdown).

It is interesting to note yield made a "lower low" by breaking below the close on Aug 10 (shown by the red horizontal line) followed by a jump back above the line on Aug 23.  This is a classic technical "double bottom" that needs to be confirmed by a closing yield above the closing high set Aug 11 @ 2.336.  A daily close above there would be very bearish for bond prices and conversely very bullish for equity prices.  Alternately a yield break below Aug 19 (bottom of the box) would be very bullish for bonds/very bearish for stocks.

Bottom Line:

In summary, overall the monthly and weekly charts are bearish.  The daily chart is bearish (but on the verge of a possible bullish signal) and the 60 minute chart is bullish.  Thus the picture is one where we are long term bearish but in a short term bullish correction phase. 

As such, I plan on holding my Provident Fund at the current 50% equity/50% cash position as it appears the short term charts will allow me an opportunity to sell my 50% equity position at a higher price level than current.

This in no way changes my long term outlook in that I believe we are on the verge of entering a multi-month bear market (assuming all my monthly technical indicators come into alignment).

Emirates Provident Fund: 

As of Friday, 26 August 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 Equity Portfolio Fund: 25%

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

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 FINANCIAL 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.

For further information please use the following email address and I will do my best to get back to you when able.

ecamquestions@gmail.com

Stockmarket Update 19 August 2011

Did anyone get the number of that bus that just hit us?????

(Quick update as of Thursdays close).

Another interesting day in the markets.  All was well on Wednesday night and Thursday we went down like a ton of bricks on little/no economic news of significance (other than the news that the Swiss National Bank was acquiring 200 million in a short term swap with the NY Fed):

UPDATE 1-Forex swaps with SNB total $200 million - NY Fed

Thu, Aug 18 2011

NEW YORK, Aug 18 (Reuters) - The Federal Reserve provided $200 million of liquidity to the Swiss National Bank in the latest week via its swap lines for foreign central banks, the New York Fed said on Thursday.

The SNB was the sole institution to tap the swap lines in the week ended Aug. 17, swapping the full amount.

The terms for the SNB swap were seven days at 1.08 percent.

It was the first time the SNB has tapped the swap lines since they were reopened in May, 2010, and the first time since early March that the Fed has provided liquidity to a foreign central bank. Then, the European Central Bank swapped $70 million.

The SNB has faced mounting pressure in recent weeks to rein in the rapid ascent of the Swiss franc as investors have run for safety on concerns about the global economy and Europe's debt crisis.

"The very high price of the Swiss franc is putting an enormous amount of stress on them," said Boris Schlossberg, director of currency research at GFT in New York. "They are using swap lines to obtain more dollars basically to go into the market."

The SNB has been pumping liquidity into the Swiss franc money market in a bid to reduce the appeal of franc-denominated assets and weaken the currency. The bank on Wednesday said it would boost liquidity further via foreign exchange swaps and by buying back its own debt, called SNB Bills.

The Federal Reserve has established swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan in an effort to respond to the re-emergence of strains in short-term funding markets in Europe. (For the full Fed report, double-click on: here) (Editing by Dan Grebler).

The question is why does the SNB need a short term swap agreement at this particular moment?  Perhaps a Swiss Bank with too much exposure on the verge of collapse?

In any case this was the excuse used by the market to sell off.  Welcome to the world of computer generated High Frequency Trading (HFT).


(CLICK ON ALL CHARTS TO ENLARGE)


SPX 15 Minute

Stunning move down on the open.  Bearish wedge spoken about previous now broken to the downside.

Appears market wants to retest 1118/1101.

Stopped out of my trading positions for a very small loss.  Now neutral awaiting a retest.


SPX Daily

Daily chart still BEARISH and on a sell signal.

Possible bullish wedge forming.  Appears price wants to test the 1119 daily closing low.  Pivot support @ 1059 looks like perhaps the ultimate target (pure speculation at this point).


SPX Weekly

Weekly chart still BEARISH and targeting 1101.

A weekly close below and the next target would be the 50% Fibonacci @ 1018 followed by the 61.8% Fib @ 935.


SPX Monthly

Monthly chart still leaning BEARISH but does not become "official" before the end of the month.  5 out of my 7 technical indicators bearish as well.  Unless we have a heck of a reversal over the next few weeks looks like the monthly will come into alignment with the weekly. 
 
Bottom Line:
 
It appears many ECAM subscribers read little-to-none of my commentary in these blog posts and merely skip to the "bottom line".
 
Just so there is no confusion, at no time have I advocated changing Provident Fund positions over the past weeks.  There have been trading opportunities for those who are swing trading/position traders and I have indicated what I have done in my own trading account.  This has nothing to do with the Provident Fund.
 
MY PROVIDENT FUND POSITIONS REMAIN UNCHANGED AND WILL REMAIN SO UNTIL THE MONTHLY CHART COMES INTO ALIGNMENT WITH THE DAILY/WEEKLY CHARTS.  

My management methodology has never changed with respect to the Provident Fund.  It is too illiquid an investment vehicle to move in and out quickly.  As such, changes are made seldom and only when there is a HIGH PROBABILITY prices have transitioned into a potential multi-month bear market.  This is only confirmed when the daily/weekly AND monthly charts are in alignment.


  Emirates Provident Fund:
As of Thursday, 18 August 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 Equity Portfolio Fund: 25%


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

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 FINANCIAL 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.

For further information please use the following email address and I will do my best to get back to you when able.ecamquestions@gmail.com

ECAM Market Video Update 17 August 2011

Wait

I've received a number of emails from ECAM subscribers over the past 2 days worried about whether they should be selling at this point into this decline.

I am currently in Toronto and unable to do a video update (which most subscribers appear to prefer) so will use the standard written format.

I empathize with these reactionary views I've received as these are very frightening times indeed in the markets.  However, far from panicking, it is times like these where in the past where I have made my greatest gains.  Alternately, it is times like these where in the past I have protected my greatest potential losses.  The human nature to flee is essential and knowing when to move is paramount.

I hope to put some context to where we are currently at in this blog along with what you may want to do with your portfolios (as always, please refer to the legal disclaimer below as I am required to publish by law).

Successful investment in equities/commodities/currencies/etc requires the ability to identify the probabilities of any given scenario.  Those that can identify market conditions where the probabilities of an investment vehicle going up in price exceed the probability that the same investment vehicle will go down in price are the ones that ultimately succeed in the investment game.  Technical analysis offers us the opportunity to quantify the potential success of any such prediction of probabilities.  I hope to use the following example today as a case in point.

We have had a rapid and brutal decline in the worlds equity markets over the past 2 weeks.  In fact, the rate of decline is unprecedented and has set numerous records for number of consecutive days down and daily point ranges (volatility).  There is real fear in the markets and amongst investors as to where this all might end up.  However, as I have stated numerous times, it is times like this I turn off CNBC and the talking heads and concentrate on the technicals.

CLICK ON ALL CHARTS TO ENLARGE

1)  History Making Event

The rate of decline over the past 2 weeks has been severe.  Given such, I went back and looked at all instances over the past 30 years where we had the same conditions:

1)  in an uptrend (as defined by the slope of the 200 day moving average being in an uptrend)

2)  daily price breaking below the 200 day SMA, and

3)  daily price closing 3 standard deviations below the 200 day SMA

SPX 1980-2011

As I have noted on the chart, over the past 30 years there have only been 3 such events; 1987, 1990 (both boxed in blue) and today (boxed in red).  This tells you how unusual this current event is.

2) 1987

SPX 1987 Decline

The market crash in 1987 is the best example of a previous market decline that matches our current levels.

As can be seen, the market was in a well established uptrend (as defined by being above the 200 day SMA in the dotted black line) that drastically broke down below 3 standard deviations below the 200 day SMA(as shown as the solid black line).

The day following the breakdown was defined by a "lower low" inter-day (the tail extending below the dotted black line) but by the days close price was back above the line.  At that point, price attempted 2 retests of the closing lows (one within a few days and another 1 month later) followed by rangebound trade.

Eventually price resumed its uptrend and new highs were eventually made in the months ahead with price once again moving above the 200 day SMA 7 months later.

3)  1990

SPX 1990 Decline

The decline in 1990 was similar as price broke below an up trending 200 day SMA.  Price once again closed below the 3 standard deviation line below the 200 day SMA (solid black line on the chart).  Price once again popped back above the 3 standard deviation line on day 2.

Where things were different on this decline was price broke below the 1st close to challenge the 3 standard deviation line a second time one month later.  That second low became the ultimate bottom and price began a very rapid advance that broke above the 200 day SMA 3 months later.

4)  2011

SPX  2011 Decline

Our current decline is shown above.  Once again, as can be seen, we broke below the 3 standard deviation line (solid black line) and regained the line on the second day.

What is interesting is price rose strongly up on day 2, strongly down on day 3 (testing the previous closing low) and strongly up today.  This indicates the incredible volatility currently in the market (market moves of 4-5% per day are unheard of).

Are we 1987 or are we 1990 or are we something new?  That is the question that will make you a fortune or save you a fortune.

In 1987 we never closed below the closing low (defined by the breaking of the 3 std deviation level).  In 1990 we closed below the previous closing low but we never closed below the 3 std deviation level a second time.  This clearly defines our trading strategy.

In the next few days if price:

1)  Closes below the previous close of 1120 AND the 3 std deviation level-  SELL

2)  Closes between the low of 1120 and the high of 1173-  HOLD CURRENT

3)  Closes above the current range above 1173-  BUY

I hope this gives an example as to how clear cut technical analysis decisions can make complex investment decisions.

Whether ultimately the above results in profit is unknown as technical analysis is not a crystal ball (as is investment in all risk assets).  What the above does do is put the probability of future market direction firmly into view (based upon historical precedent) at times where the market does not appear to have any clear "order".  This allows me to clearly define my risk/reward and to clearly define where I have been "right" as defined by future market direction (and to stay with the trend) and where I have been "wrong" as defined by future market direction (and to sell current positions).

Only the market will ultimately tell us where it wants to go.  We merely need to listen to what it is saying and react accordingly.

Emirates Provident Fund:

As of Friday, 11 August 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.

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 FINANCIAL 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.

For further information please use the following email address and I will do my best to get back to you when able.

ecamquestions@gmail.com

ECAM Market Update 07 August 2011

ELLIOTT WAVE BEAR MARKET

A quick note from Bangkok before my HK shuttle.

The markets melted down over night and now it appears a new Bear Market is confirmed according to Elliott Wave.

SPX Elliott Wave

The close last night broke below the Primary Wave 1 @1219.  This has allowed for an objective Elliott Wave confirmation the 5 Wave Bull market from Mar, 2009 is over.

The 1st move on this decline should be to the 1150 area (head and shoulders top + measured move of the trading range for the past 6 months).

SPX 50 dma Std Deviation

The markets are extremely oversold at this point as per the Standard Deviation chart of the SPX above.  A 3 standard deviation move below the 50 day moving average is a rare "panic selling" event.  As such, we should expect a snap back rally soon to alleviate this oversold condition.

As Aug and Sept are the 2 weakest months for the markets there is very little to stop us from continuing down.  While I would normally wait to reduce my positions until the monthly chart confirms the move, I think it is wise to reduce exposure on any market advance in anticipation the monthly chart at the end of Aug will confirm the Elliott Wave analysis.

I will move to a 25% equity/75% cash position on any significant market advance over the next week.  Good levels to sell would be 1222 and 1240 on the SPX.

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 FINANCIAL 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.

For further information please use the following email address and I will do my best to get back to you when able.

ecamquestions@gmail.com

 

BEAR ALERT

From my last update 09 July:

"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)."

"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."

"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."

 It has been a very interesting few weeks with the sovereign debt problems in Europe and the clown act in Washington.  As a result, the markets have moved to a critical juncture which need to be monitored closely over the next few days.  There are times in any given market where a critical tipping point is reached and it could go literally either way.  We are at that point today.

I continue to read with amusement the fearful predictions from "analysts" who attempt to prognosticate the direction of the market.  Truth be told at this juncture anyone who tells you with certainty that they know how this is all going to play out is pure media hype.  We have NEVER been here before in the history of capitalism so how can anyone with certainty prognosticate the future direction?

My "gut" tells me we are in deep doo-doo but "gut" reactions is what 99% of investors use when making decisions; and 99% of the time they are WRONG.  I've learned through years of experience to ignore my "gut" and let the technical indicators tell me where we are. There are telltale signs in the technicals that will tell us WHEN (not if) we are in trouble.  I will speak about those in this blog.


Click on all charts to enlarge


1)  The Forest and the Trees

In investing it is important to look to the forest first and then drill down to looking at the trees next.  As I have written about before, it is my belief we are in the "Winter" phase of the Kondratieff Long Wave Cycle.  The Long Wave Cycle has historically been a period of approximately 60-80 years with 45-60 "good" years and 15-20 "bad" years.

It is my belief we entered the Winter phase in 2000 and, had Greenspan let the Capitalist market cycle do as it should, it would have led to a period of 15 odd years of decline to cleanse the excesses out of the system built up over the last 55 "good" years (1945-2000).

Instead, believing the U.S. Federal Reserve had the power to literally defy "economic gravity", he juiced the system with so much liquidity that it delayed the onset of the Winter cycle.  The outcome of the "juice" was the housing bubble which ultimately let to a much worse economic condition than that which existed in 2000.  Bernanke has done nothing more than to again try to defy "economic gravity" by way of the QE 1 and QE 2 in the desperate hope to once again delay the inevitable.

This Winter period in technical analysis terms is known as a Secular Bear Market.  The last secular bear market began in 1929 with the Great Depression and ended in 1955 (26 years later).  It took a severe deflation along with the loss of millions of lives in a world war to expunge the excesses from the Capitalist system built up over the previous 45 years.  I fear that will happen again at some point (a later discussion) but for now all the attempts at delaying a period of required severe deflation (which would require the writing down of massive amounts of debt, the bankruptcy of 1000's of banks and the losses of millions of jobs worldwide) is doing nothing more than delaying the inevitable.  You cannot escape economic gravity; you can merely hide and delay the path to be followed.  You cannot cure a cancer patient by pumping him with aspirin and pretending all is well; it takes surgery (sometimes drastic) to cut the cancer from the body.  The built up debt in the current system is the cancer.

The good news is within every secular bear market there are cyclical bull markets.  These periods are counter-trend moves that go opposite the direction of the secular bear market.  We had one in the period 2003-2007 and we are still currently in our current one (2009-present).  At some point this cyclical bull market will end and we will again move with the trend of the secular bear market.  The key is to understand the economic world in which we find ourselves and have a battle plan to survive to the next Spring (the next secular bull market).

How will we know we have exited the secular bear market and entered the next secular bull market phase.  A quick look at a chart from 1900-present shows the peak of 380 reached in 1929 was not surpassed again until 1955.  That was the point at which the next secular bull market began.

DJIA 1900-Present

Using history as a guide until we can get above 13930 (in inflation adjusted Dow points) we must assume we remain within the secular bear market.

2)  Monthly Chart

SPX Monthly

The markets have been stuck in a trading range for entire 2011 year to date.  I have indicated the range in the black box on the chart.

Note that the top of the 2 previous bull markets were defined by periods of 8-9 months where a trading range was established which eventually was broken to the downside.  Coincident with these trading range breakdowns was a monthly close below the 12 month simple moving average along with at least one of the technical indicators confirming the move.

As we stand today we are on the verge of a possible break below the current trading range.  We are also below the 12 mSMA (1278.66).  HOWEVER none of the technical indicators has yet to confirm the price action.  Also my month chart does not turn bearish until the MONTH closes below the 12 mSMA.  It did not do so in July; we are below it inter-month in August but it would have to close below the 12mSMA at the end of August (along with at least 1 technical indicator confirming; the more the better) to be reasonable certain we have entered the next bear market.  We are not there yet.

3)  Weekly Chart

SPX Weekly

The 3 year weekly chart clearly shows we have broken below the trend line established from the March, 2009 low.  The boxed area clearly shows our trading range for the past 31 weeks.  The technical indicators are are bearish indicating the intermediate term direction of the markets is down.

The key to note on this chart is the Elliott Wave numbering.  As I have spoken about previous, my current count has us in wave IV of a five wave advance (green numbers on the chart).  If this count is correct, we should be bottoming here and starting our next move up to point V on the chart.  That level would be approximately 1440 on the SPX.

The problem with Elliott Wave analysis is there is always an "alternate count".  That count is shown on the chart as A-B-C in red.  If this count were to be correct, we would have topped in late April @1370 and we could expect the start of a multi-month bear market decline.

How will we know which count is correct?  As I wrote about previous, one of the "hard rules" of Elliott Wave is wave IV cannot overlap wave I.  As wave I topped @ 1219, any close below this level would negate the bullish "5 wave" count and activate the bearish "A-B-C" count.  Another reason to watch the markets closely over the next week.


4)  Daily Chart

SPX Daily 6 month

The daily chart shows the break of the triangle we were within and the test yesterday of the lows @ 1249.05.  It is extremely interesting to note price inter-day pushed below this support but by the end of the day the bulls regained control and pushed the market back up to close above this level.

It is also interesting to note the volume on this daily advance was the highest up volume since March 20; the start of a multi week market advance.  Will we get the same again?  We'll find out soon enough.

SPX Daily Trend Line

It is also interesting to note we have now broken the trend line from the 2009 bottom.  Note we are currently in the fairly strong volumetric support/resistance area defined by 1250-1305.  Should we break below the next strong level is not until 1140-1190.  This would tie in nicely with the targets on the head and shoulders pattern discussed next.


5)  60 Minute Chart

SPX 60 Minute

I spoke in my last blog about what appeared to be a "head and shoulders" topping pattern forming on the 60 minute chart.  That pattern is now fully formed and in play as price broke below the "neckline" of the pattern as indicated on the chart.

The target objective based upon the formation of the chart is 1150 on the SPX.  If this pattern works out "textbook" that would move us below our magical 1219 level and set the stage for the next bear market.  Another piece to the puzzle.



Bottom Line

-we are within a secular bear market from 2000 (indisputable)

-we are within a cyclical bull market from 2009 (indisputable)

-we are very close to a bear market signal on the monthly chart (no technical indicator confirmation)

-we are on the cusp of a breakdown of a 31 week trading range on the weekly chart (but have yet to close below the range and the week is still not finished)

-we are hanging onto support on the daily chart (pushed below the March lows @1249.05 but could not close below that level)

-we have a completed head and shoulders topping pattern on the daily chart (target of 1150)

-we are very close to an Elliott Wave bearish signal on a close below 1219 (which would confirm the next cyclical bear market has begun).


As can be seen, we are at a tipping point.  This could be an incredible buying opportunity (if we have bottomed and are on our way to a wave V top) or it could be the cusp of the next bear market.

It is times like this you need to concentrate on the indicators.  They will tell me soon enough which way I need to be positioned.  For now they are telling me to sit on my hands, watch and wait.  Sometimes the best thing you can do is nothing at all.



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.


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