Market Summary

The $USD index measures the performance of the US Dollar against a basket of currencies.The currencies are: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF) and Swedish Krona (SEK). This performance is calculated by a formula whose real-time result is represented in the chart below which is a 3 yr. Weekly chart. As a result of the falling value of the dollar commodity prices have gone up. However, by looking at the chart there is a divergence between the price of the dollar and the CCI indicator. A divergence is where price makes a lower lows and the indicator makes a higher lows. This is a sign that the bottom in the dollar may have occurred which would mean that a top in commodities prices, like gold and oil, has occurred. We can follow oil by the gas price at the pump. Crude oil accounts for 73% of the price of a gallon of gas. Click on chart to enlarge.
The table below list some of the markets I follow on a regular basis. As can be seen, gold and oil took the biggest hit this last week just as the dollar is showing some signs of bottoming. However, looking at the 4 Week performance oil and gold did the best. Over the last 3 months Nasdaq and oil have done the best and the small cap index came in 3rd place with gold is the only loser down 9%. For the last 12 months gold still has its glitter up 35% and oil came in 2nd up 31% with the remaining indices in the red.

Another LQQK at GLD

Gold is interest rate sensitive and if interest rates go up that will push the US dollar up and gold down. As can be seen in the chart below of GLD, which tracks the price of gold by 1/10 , gold made a top on March 17th and there have been 3 lower tops since then. This is the classic definition of a downtrend: a series of lower highs. Gold lost some of its glitter today, down heavily. It is interesting to note that the top in the market in gold happened the same day that there was a bottom in the S&P500 index. In other words, as the stock market was falling gold was going up, and when the stock market hit a bottom and started going up gold started going down. Note the so called "Golden Cross" to the downside where the blue and red lines cross (the 20 and 50 Simple Moving Average) which is a bearish sign. And also note the CCI is below 0, also a bearish sign. Click on chart to enlarge.

Buying Opportunity Or A Change In Trend?

If we look at the 20 day 4 hr chart of the S&P500,the first chart below, we see that the fast band of moving averages has moved below the slow band and this is an alert to a buying opportunity and a warning sign of a reversal. However, a true reversal will not occur unless the fast band moves below the slow band on the daily chart, comes back to the slow band, and bounces down from there. See second chart for 3 month daily chart. The 4 hr (or half day) chart is just for keeping us alert to what goes on with the daily chart. So, while we have an alert to a possible trend change, it has not happened yet. This could be a buying opportunity if we hold support here. That would make this a buying on a dip type of opportunity. We will just have to wait and see. Click chart to enlarge.
The 3 month daily chart

Market Summary

The markets have a funny way of reversing themselves over time and going sideways so that it is hard to tell the direction of the market. This week was a good example of that. This last week all the indices followed by the table below were down except gold. As you may recall, an opposite picture occurred just the week before when all the indices were up. What’s up with this? Well, as I mentioned the market came up to the 80 week moving average and the 200 day moving average and made an about face and went the other way. So what we have here is a chage in direction, up one week and down the next. I will be paying attention to the 1 week, 4 week, 3 month, and 1 year perfomance columns to watch market direction and reversals. I believe we have made a reversal here. How far down will we go? We will just have to wait and see. Click on table to enlarge.

The 80 Week Moving Average

As can be seen in the chart below, a 3 year weekly chart, the 80 SMA has worked well as a support line for the uptrend of the market over time. This support line was broken to the downside the last week of 2007. The question is: Will it be a resistance line as well? As can be seen prices have come up to this line, which is somewhat like the 200 SMA on the daily chart, and bounced downward. Stan Weinstein discusses the 80 weekly moving average in his book - Secrets for Profiting in Bull and Bear Markets. The 80 week moving average is 1440 and the high this week was 1440.

The S&P500 was down 3.5% this last week and formed what is called a bearish outside key reversal pattern. This is when prices go above the prior week highs and close below the prior week lows. It is very bearish and indicates prices will most likely continue down. Click on chart to enlarge.

Which way is the market going?

And the answer is – drumroll...reminiscent of the academy awards when the best picture awards are being anounced – depends. The direction of the market depends on the time frame that you are looking at. For most of us our time frame of reference is our lifetime or less. The less is measured in years, months, weeks, and days. Lets take a look at the market over the last 10 years and then zoom in.

This first chart is a 10 year monthly chart of the S&P500 with a 12 Simple Moving Average(SMA) in blue. I like the 12 SMA on this chart as it is recommended by Martin Pring who is a great technical analyst. His web site is here. As can be seen, the direction of the market has been Up, Down, Up, and Down again over the last 10 years. I have drawn the market direction onto the chart. Click to enlarge.If we zoom in and look at the last 3 months we have changed our perspective with regard to time and we have a slightly different picture, although not really as the prices below are also in the chart above. Here we see a 3 month weekly chart of prices and I have drawn a single line to represent the low of the last 4 weeks. The market made a low on the chart the week of 03/17 at approximately the 1260 level. For the last 4 weeks the market has gone Up, Down, Up, and Down again. In other words.....sideways. Drawing lines helps make the picture more understandable. If the market breaks the line drawn in below chances are the market will go lower. In the prior post I mentioned we are up against the 200 SMA on the daily chart. We need to break above this level, currently 1426, to go higher. Click chart to enlarge.

The 200 Day Moving Average

Of the many indicators watched by market technical analyst one of the most important is the 200 moving average. On a daily chart the 200 moving average(MA) is a long term indicator: if price is above the 200 MA the long term trend is up, if not it is down. A 5 year daily chart below shows that for the most part price has been above the 200 MA (blue line) until the second half of 2007. However, now, price is again up against the 200 MA. The question remains which side of this blue line price will stay on in the future. Click on chart to enlarge.

Market Summary

This last week was a good one across the board in all the 7 markets followed in the table below. As can be seen oil and gold are the winners in the 12 month performance catagory, while oil and the EFA are the winners in the 3 month catagory. Gold was the only loser in the 3 month catagory. Click on table to enlarge.
Legend: $COMPX = Nasdaq, $DJXOX = 1/10 DJIA, $OIXOX = Oil Sector Index, $RUTOX = Russell 2000 Small Cap Index, $SPXOX = S&P500, EFA = International iShares ETF, GLD = 1/10 price of gold.

I have here a performance chart for the last 12 months for $HSI(China), $AORD(Australia), $TSE(Canada), $DAX(Germany), $SPX (USA), $FTSE (England),and $CAC(France). Click on chart to enlarge.
World markets are all doing well and making breakouts and trending upwards since the middle of March. At least the 7 major world indices I have shown here. As can be seen China’s Hang Seng Index is up the most (+22.04%) and the Canadian S&P/TSX comes in second (+6.84%) in terms of performance for the past 12 months. Click on chart to enlarge.

What is buying on a dip? Part 2

As a follow up to my last post lets take a look at the dip as it occurred a few days ago. As can be seen price came down to the slower band of moving averages which acted as support and which includes the group of exponentially moving averages 30 and above (EMA 30, 35, 40, 45, 50, and 60). The faster group of exponentially moving averages (EMA 3, 5, 10, 12, and 15) were all above the slower group and this is by definition an uptrend. When price came down to touch the lower band this was a buying opportunity. I have a moving average envelope set at 2% distance away from the EMA 22 which is an approximate middle space between the EMA 15 and 30. This lower line can be used as a stop loss point if touched limiting loss to less than 2% (less than $200 on a $10,000 trade). We can raise our prior stop to below this last low locking in some profit and move this purchase to break even. Click on chart to enlarge.

What is buying on a dip?

Buying on a dip is buying in an uptrend when prices pull back to support. What then is support? I define support as being the price where the fast band of moving averages, being above the slow band, comes down to rest on the slow band. The S&P500 market is illustrated below on a 20 day 4 hour chart. Here each candle represents one-half of a trading day. The best place to buy on a dip is on the first dip in an uptrend. This is a great place to add to a profitable position if you got in soon after the uptrend began – a place I call the sweet spot. It is important to not confuse buying in a downtrend with buying on a dip. Click on chart to enlarge.

Flags and Pennants

My last post brought to mind the idea of chart patterns which are a well know way of looking at price action by the patterns price makes on the chart. Of all the patterns the parabolic price pattern is the one that has the potential for the most gain because price goes straight up. It also has the potential to reverse quickly and thus wipe out the gains, or even result in a loss for those that bought at the top. The $CRB monthly chart was parabolic up to the beginning of March when it quickly reversed. This reversal led to the development of a pennant formation which has broke out to the upside. I will discuss bull and bear flags at a latter time but here wish to illustrate how the $CRB daily chart has broke out of a pennant formation and this is a sign inflation could rise. I have embedded an illustration of a bullish pennant in an uptrend on the chart. Click to enlarge.

Inflation and the $CRB

I have mentioned that I follow the $CRB as a gauge of inflation and as it relates to the price of commodities and gold here . The $CRB hit an all time high at the beginning of March this year as seen in the big red candle on the right side of the chart below, which is a 5 year monthly chart. As can be seen prices have been rising steadily, and even parabolically since last summer. The last 4 months on this chart forms what looks like what is called a bullish pennant and if this breaks out to the upside it could be bad for the economy. Click on chart to enlarge.
A 3 month daily chart with the pennant outline drawn in below shows that prices are up against a downtrend line. Lets hope that prices do not break this line to the upside as it will indicate higher prices ahead.

Market Summary

In contrast to the 12 month performance of both oil and gold, this last week showed all the other indexes to be gainers while oil and gold were losers. And if you look at the 4 week performance data all the indexes are in the green except gold. As I mentioned last time I am seeing commodity prices come down from all time highs. There was a bubble in commodities that has burst. This is what you would expect in the face of a recession. During a recession people are out of work, consumer spending slows, and prices fall. Also, the value of the dollar has been rising which should push oil and gold prices lower. I will discuss this in greater detail in coming days. Click on the table to enlarge.
Legend: $COMPX = Nasdaq, $DJXOX = 1/10 DJIA, $OIXOX = Oil Sector Index, $RUTOX = Russell 2000 Small Cap Index, $SPXOX = S&P500, EFA = International iShares ETF, GLD = 1/10 price of gold.