Tuesday, October 25, 2011

Stock Market and Currency Update 25 October 2011

Market update as of Tuesday, 25 October 2011.

Over the past 12 weeks the markets have been in a trading range that has frustrated both the bulls and the bears.  Sitting on my hands and watching has been an EXCELLENT strategy.  Not exciting but right.

Fundamentally the 3rd quarter earning reports have been generally positive. Offsetting this has been the debacle in Europe over the way forward to sidestep a Greek default (followed by a Portugal default, an Irish default, a Spanish default, an Italian default, etc, etc, etc).

The European overhang has kept us in this trading range. A final decision is due tomorrow (Wednesday, Oct 26). The markets are indicating the outcome will be favorable but there are coincident indicators that have me somewhat on guard.


SPX Daily

The daily chart clearly shows the 12 week consolidation range the index has been within.

There was an attempt the last day of September to break below the range followed by a return back into the range the 1st trading day of October. Since then the markets have moved straight up into our current levels.

When judging the validity of a move I always look for 2 days of consecutive closes above/below a given level to confirm the move. The fall into late Sept was a “head fake” as it was not confirmed the next day. Similarly the 1st 2 attempts to break above the current range last week were not confirmed. HOWEVER on Friday/Monday we had our 1st 2 day consecutive breakout confirmation. This is BULLISH and a valid breakout.

We have now entered a critical level between the breakout point at 1220 and current resistance level at 1255-1260. In addition the 61.8% Fibonacci level is at 1257 with the 200 day moving average at 1274. A 2 day close above these levels would be firm indication we are going much higher into the end of the year and the first part of 2012.

Will be get there? We will know over the next few days.

The daily chart is BULLISH.

SPX Weekly

The weekly chart turned bullish last week.  All technical indicators are bullish with the exception of the ADX which has yet to confirm the move.

The weekly chart is BULLISH.

SPX Monthly

The monthly chart remains tantalizingly neutral. Price has pushed back to the previous level of consolidation (up 10.85% month to date for the best October in 20 years) but remains below the 12 month moving average. Most of the technical indications are bearish but the RSI has refused to go along with the crowd but breaking below the previous head fake decline in 2010.

The monthly chart remains NEUTRAL.

SPX Point and Figure

The point and figure chart turned bullish on Oct 07. A “Double Top Breakout” occurred on Oct 24 as shown on the chart.

As can be clearly seen, the 1230 level is now key support. Based upon the structure of the chart the projected price target is now 1540.

The PnF chart is BULLISH.

SPX Bullish Percent Index

The bullish percent index is a measure of the number of stocks on the S&P 500 index that have “buy” signals according to each individual stocks Point and Figure chart.

As of today 69.40% of the 500 stocks on the SPX have PnF buy signals. During bull markets a level of greater than 50% would be required. We have decisively broken the 50% level therefore it is a further BULLISH indication.

Given the above, it is clear the market believes we will have a successful outcome to the European problem  However, when looking at the overall picture it is helpful to look at coincident indicators to confirm this outlook is correct.

West Texas Intermediate Crude Oil

If we have entered a new bullish period we would expect commodities to confirm this bullishness. It is therefore interesting crude oil has attempted to break out of its own trading range.

Note on Monday we put in the 1st daily close above the range. A second daily close above the range would add further evidence the equity markets are correct in their “all is well” assessment. We should know today.

Copper Daily

The daily chart of copper shows a similar consolidation zone.  In the case of copper, we have yet to break above the current trading range.  Many times copper is referred to as “Dr. Copper” as it tends to be a leading (and correct) indication of economic expansion.  It has been on a continuous decline since the 1st day of August.  It needs to be watched closely for confirmation.

Gold Daily

The daily chart of gold is very interesting. It too has a consolidation zone it has been within for some time. Unlike both oil and copper, gold has not pushed to the top of its trading range. Normally I would consider this a bearish non-confirmation.

However, in this case I believe it may be equity positive. Currently I view gold and silver as “alternative risk assets” to equities. It has been where the hot money has flowed for the past few years. Should gold/silver collapse below their trading ranges I believe money will flow out of precious metals and into other risk assets such as equities. As such, a break DOWN in gold (below 1600) would be encouraging.

USD Daily

The daily chart of the USD shows the well defined trading range that broke to the upside in early September. The 76 level is critical.

Should the USD break down below 76 that would be equity positive. However, should it find support at current levels and begin rising once again it will be equity negative.

We are sitting today right at the 76 level. A 2 day confirmation move below 76 would be very bullish for equities.

Euro Daily

Last (but certainly not least) is the Euro. This is “ground zero” for everything I have discussed above.

Should the euro be able to put in a 2 day close above 140 then it will be the “all clear” signal for equities to rise over the next few months. Alternately, should the euro fail at 140 equities will be in real trouble.


We are at an inflection point in the markets. A successful outcome to the current meetings to sort out the Euro mess and there is a very real possibility we go considerable higher in the equity markets. Alternately, should the politicians disappoint in providing a plan that is less than adequate and the equity markets will punish accordingly.

At this point it is a coin toss as to which way we go. The markets themselves have signaled “all will be ok” yet the coincident charts have indicated a “wait and see” attitude. Should they all come into alignment we could be in for a hell of an advance; should they fail we could be down considerably.

We will know the outcome over the next 24-48 hours.

Emirates Provident Fund:

As of Tuesday, 25 October 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.

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



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