A Day of Rest . . . Thank Goodness!
I read a statistic this weekend that in the last 50 years there have only been two times that the market first went up five days straight and then down five days straight. On Friday the market avoided making it a third time as short investors/traders decided to take a bit of risk off the table and maybe a few decided this might be a good place to add to their positions.
The Quadruple Witching Month often brings a substantial amount of volatility to the markets as institutions will rebalance their books and reallocate their portfolios. This is one of the reasons we have seen such dramatic shifts in the market, and combined with the overall negative sentiment, I expect this next week to be just as volatile as investors search for security and areas that will provide some growth. In related news, there is talk (rumor) of many large hedge funds liquidating their holdings in precious metals to cover other losses as to the cause of the selloff that occurred this week. No matter what the cause, the key is to have specific stops (mental or actual) set to preserve the gains made over the previous year. (See the commodities section and the weekly review for more info on this topic)
Short Term Trend—The short term trend began a brief bounce this morning, but couldn’t gain any substantial traction as the weekend loomed ahead. There is still a good potential for a short term bounce, but the stronger, longer term trends have shown they are in control.
Intermediate Term Trend—Bearish to Neutral
Slightly Longer Term Trend—Still a downtrend from the April highs and with high risk that the downtrend could continue.
Market Strength Indicators—All five market strength indicators are in the bearish camp.
Intermarket Analysis—The TNX made a bullish engulfing pattern gaining from yesterdays decline out of support—this supports the potential for a short term bounce in equities. The VIX closed relatively flat after spending most of the day higher, a sign that additional fear may be available in the market. The US Dollar was also flat.
International— The BRICs, much like the US market, made slight gains after the big weekly decline. The FXE (Euro) formed an inside day at support while the British Pound Sterling had a nice bounce from its oversold condition. The EUR/USD is showing a class one bullish divergence on the MACD histogram. This is confirmed by a bullish divergence on the stochastics and the near term bullish divergence on the market forecast graph. In addition, this currency pair registered a full bullish cluster on 9/08 and 9/21. If the EURO finds a bit of strength here and the US Dollar declines, a rally in US equities may result—again supporting the idea of a short term bounce in equities.
Commodities—GLD lost its luster today and overshot my expected target of 165 closing more than 5% lower today at 159.80. Copper continued to slide lower. SLV also dropped heavily losing 14% today to close near the 40 level. Investors have obviously had enough of these metals for the time being. This morning (Sunday) I checked these futures and see that they are down over 5% with silver down closer to 15%.
Weekly Review—The weekly candles are telling in that the lower high and break of the diagonal uptrend line on higher weekly volume give us bearish signals. The downtrend was led by the RUT as it lost 8.6%, with the SPX losing 6.6% and the NDX losing 4.3%–all of them on higher weekly volume. As we have mentioned before, the horizontal support tends to be stronger and on the SPX that would still provide us with a weekly close below 1123 as a key break of this longer term support area. IF the market can hold this area of support, the current week’s low would technically be a higher low from the one set during the week of 8/08. However, this week’s bearish engulfing candle pattern does not look good for the bulls going forward.
In looking at the flow of institutional funds, the past month has seen another large outflow of funds. The Weekly ATR is now well above the highs of last summer, 2010, and appear to be moving toward those hit in the fall of 2008. The weekly ADX is more comparable to last summer of even the summer of 2008. The weekly consolidation indicator in almost fully charged, indicating it can begin a strong trend at any time. And, even though the Bulls vs Bears sentiment indicator is bullish, the NYSE short interest is on the rise.
An interesting development has been the sell-off in commodities this week—a continuation of the previous weeks trend. GLD (-9.2%), SLV (-25%), USO (-8.9%), and JJC (-16%) have all fallen hard. After such a large move in such a short amount of time, we might expect a short term (dead cat) bounce before these ETFs can find some longer term support. With the violation of the neckline from the double top pattern—my target for GLD is in the 150 area.
Good Trading,
Dave
themoneybuzz 