Wednesday, May 16, 2012

Stockmarket Update 16 May 2012

From my last update 25 April 2012:
2) When my short term charts move to positive, I intend upon increasing my equity exposure to 75% AS LONG AS PRICE STAYS ABOVE KEY SUPPORT @ 44.83-45.10 as discussed previous. The closer the current correction comes without breaching that key support area the better. I always enter a trade thinking about the downside "how much am a possibly going to lose"; the less the better!
3) Once in the new position, should price subsequently breach key support @ 44.83-45.10 it must be assumed a new significant decline is in the offing. Should this occur, I would be forced to switch my holdings back to 100% USD cash. Fortunately given the current low levels the loss would not be significant.
Since my last update world stock markets have continued to decline.  Once again, ground zero is Greece and their ongoing political debacle in attempting to decide upon a new government.  This uncertainty has resulted in a significant breakdown in the Euro along with dragging European markets significantly downwards.  This (of course) affects the price levels in our EK A/B Provident Fund equity positions given their mandate to invest as per their benchmark; the MSCI World Index.

Click on all charts to enlarge:

ACWI Monthly:

The long term monthly ACWI chart (my proxy for the MSCI World Index) remains weak.

Having done extensive back testing, I have determined the best monthly simple moving average to employ on the MSCI World Index is the 8 month simple moving average.  As such, this change has been incorporated in this monthly chart of the ACWI.

As can be seen, price inter-month is currently below the 8 month SMA.  A very good lead indicator for the past few years has been the 14,3,3 Full Stochastic which has turned bearish.  The monthly RSI is now back below 50, the Force Index is only slightly above zero and decreasing rapidly, and the Histogram bar for May has reversed sharply downwards from the April reading.

The long term chart is BEARISH.

ACWI Weekly:

On my last review I spoke of the important support level @ 44.83-45.10 on the daily chart.  On this weekly chart I have outlined the important weekly support which was 44.68-45.68 (based upon a weekly closing price).

Clearly it can be seen at the end of last week price was sitting right on this support.  As of Monday, price has broken this support zone and now looks to want to drift to the next layer of support @ 42.77-43.22.

I have annotated on the chart the previous price zone marked as a blue box (July/2011-Jan/2012). 
Should price break the current support zone there is every reason to believe we could decline back to the bottom of the box near 38.25 (approximately 12% decline from current levels).

All technical indicators on the weekly chart are bearish.  Price must find support @ 42.77-43.22 or it must be assumed the next bear market may have arrived.

The medium term chart is BEARISH.

ACWI Daily:

The daily chart of ACWI continues to look weak.  This has been a tricky chart as a buy signal was generated on April 26 (which I was watching closely as a possible new "increase equity exposure" entry signal).

The reason I did not pull the trigger was based upon 1 indicator; the RSI(2).  The beauty of this indicator is it can give you valuable information both short term (day trading) as well as more intermediate term (1 week),  Normally an RSI(2) <5 indicates a very short term oversold indication.  As such, it is a good low risk entry into a short term trading position.  However, it can also provide valuable information more long term based upon how it reacts AFTER a short term buy signal.  Should price subsequently shoot up to >95 this indicates a strong market where participants are buying on strength (bullish).  Alternately, when the RSI(2) cannot exceed >95 on this short term buy signal, it is a sign participants are selling on strength.

As shown, the ACWI has been unable to generate an RSI(2) >95 since early February.  The late April push came close but did not exceed this important level.  Given such, I sat on my hands and watched over the next few days to see if this short term push was for real or merely a "bull trap" condition.  It now appears that was the case given the subsequent decline to current levels.

All technical indicators on the daily chart are bearish.  Both the RSI(14) and RSI(2) are indicating a short term oversold condition.  As such, it can be expected there will be a bounce very soon.  However, given the strong daily overhead resistance now at 44.83-45.10, it must be assumed the trend is down and any "rips" should be sold and not bought.

The short term daily chart is BEARISH.

ACWI Point and Figure:

The Point and Figure chart continues to indicate a bullish condition with a price target of 62.  Short term a 3-box reversal has taken place (series of "O"s) indicating the short term trend is down.

This chart shows very clearly the strong support at the 36-37 level.  It can be assumed should the current decline continue this would be a good area to look for solid support.

The PNF chart is long term BULLISH but short term BEARISH.

As I have mentioned previous, the key going forward is going to be Europe.  The U.S. is still relatively bullish while the Far East remains neutral.  All eyes are on Europe.

As such, it is interesting to look at the Euro again for some clues:

Euro Daily:

As can be seen, the Euro had been confined to a tight range between 129.75-134.50 since Jan/2012.  Given the worlds markets remain tightly correlated to the direction of the Euro, it is essential to monitor it's progress for clues as to the future direction of equities.

Going back the April 26 and the short term technical ACWI buy signal noted previous, another clue this equity buy signal was suspect was the rather weak buy signal on the Euro (which was sitting right at the declining trend line from Feb 24 high @ 134.86).  Had the Euro been able to put in a "higher-high" by exceeding 133.68, this would have been a very good high correlation signal indicating the short term equity buy signal was correct.  However, as can be seen, price rapidly from the declining trend line and has since broken below the important support level @ 129.75.

The Euro continues to look very weak.  Price is approaching support at 126.75 (which is also the bottom of the trend channel I have tentatively drawn).  The RSI(14) is oversold so a short term bounce can be expected soon.  Given the very large short positions in the Euro, it can be expected any bounce may be quite violent to the upside as trading stops are taken out.  I suspect the ECB is looking at this closely and it would not take much Central Bank intervention to pop the Euro quickly upwards should the current Euro decline become disorderly.  However, given the ongoing issues in Europe it appears any strength in the Euro should be sold.

Euro Weekly:

The weekly chart of the Euro also looks terrible.  The technical indicators remain week with the ADX(14) having remained bearish since August/2011.  The MACD has just rolled over bearish (again), the RSI(14) remains below 50 and the Full Stochastic remains weak from early April/2012.

The previously discussed support @ 126.75 is clearly shown on the chart.  A weekly close below this level and the next support would be the bottom of the current bullish wedge formation (drawn on the chart in black)  near 125.  Should this not hold there is every reason to believe the May/2010 low below 120 will be visited.

Euro Monthly:

The monthly Euro chart is at a very interesting point.

As shown on the chart, price is currently right on the uptrend line from the 2000 low @ 82.00.  The long term RSI and MACD remain downward sloping.

Should price break the uptrend line there is every reason to believe the Euro will need to test lower levels (50% Fibonacci @ 121.10, strong price support near 117.00, and ultimately the bottom of the price channel and 61.8% Fibonacci @ 111.87).

Bottom Line:

-The Daily, Weekly and Monthly ACWI charts are bearish.
-Price has broken the significant daily support level of 44.83-45.10.
-We have entered what is traditionally the weakest period seasonally in equities (May-Oct yearly).
-The Euro has broken significant support below 129.75.

Given the price action and technical indicators over the past 2 weeks, I have refrained from increasing my equity exposure in the Provident Fund.  In hindsight this was a good move.  As per my previous post, with the breakdown of the significant support it must be assumed price will continue to decline over the medium term.  The "safe bet"  is to reduce equity exposure.  However, price is currently oversold and due for a short term bounce.  Any bounce should be sold.

The only scenario in which bullish bets should be taken is if price can again recapture the 44.83-45.10 area (which will now act as resistance).  I do not believe this will happen without significant Central Bank intervention and a solution to the Greek political crisis.  However, nothing can be ruled out at this point given the crazy situation in Europe.

Given the current technical picture and political uncertainty, I will be switching my equity positions into USD cash on any significant short term rally in equities over the next week.  Given my current holdings this will entail switching from the Russell Global 90 Fund (currently at 40%) into the Russell US Dollar Liquidity Fund II.  To keep the switch simple, I will leave the Fidelity International Fund at it's current 10% holdings.

As discussed previous, this will not change my ongoing monthly investment allocation strategy of investing 100% into equities in the A/B accounts with each and every monthly provident fund contribution (dollar cost averaging).  As such, ongoing monthly provident fund investments will remain 40% Russell Global 90 Fund, 30% Fidelity International Fund and 30% BGF Global Equity Fund.

As of today I remain in a 50% Equity/50% USD Cash position as I indicated in my last post:

-Russell Global 90 Fund: 40%
-Fidelity International Fund: 10%
-Russell USD Liquidity II Fund: 50%

My switch out of the Russell Global 90 Fund into the Russell USD Liquidiy II Fund will be blogged as it occurs.

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