Happy 4th of July

There is a pattern in which the market makes a rally into a 3-day weekend and then reverses on Tuesday as happened last Memorial Day weekend when the market rallied up to May 30 and then reversed June 1 continuing the down trend that began with the May 2 high of 1370.58. So far the low 1258.07 on June 16 has held for more than 2 weeks and the question is with price at 1339.67 will we make new highs to take out the May 2 high or have another long weekend reversal to take out former lows? The chart below of the S & P 500 two month daily shows recent market action. Click on chart to enlarge.

On a longer time frame the monthly chart below shows that if the June 16 low holds that we will have made a 4th wave bottom on the monthly chart. Note how the last two red candles on the monthly for May and June both formed Hammer Candlesticks which is very bullish and that should the market take out the high of last month June at the 1365 area it should be off to the races as the market rallies higher. Click on chart to enlarge.

Market Summary

The chart below of the S&P 500 shows where I have drawn in 5 waves in blue and a divergence pattern between price and the Relative Strength index in red. This pattern is consistent with Elliott Wave Theory which enjoys a rich history in market technical analysis. Indeed, I have posted this pattern before back on August 11, 2010 which was the end of wave 1 in this cycle and lead to an approximate 2 week pullback to the bottom of wave 2/start of wave 3 at the beginning of September 2010. This illustrates the fractal nature of the markets where the first wave can be seen as composed of 5 smaller waves. Again, I posted back on April 25, 2010 another example of this 5 wave patter and this time lead to a 9 week sell off in the market to the lows of July 2010. Because of the extended nature of the advance that we have enjoyed since March 2009 I am inclined to believe that we will again have a more severe sell off that is likely to last at least a few months. In fact, this could be the beginning of a fourth wave on the monthly time frame Elliott wave pattern. Other factors influencing my thinking here are the European debt crisis which is pushing the US Dollar higher, and consequently the stock market lower. And also the end of the Fed QE2 program scheduled to end at the end of June. Click on chart to enlarge.

The table below shows the nine S&P 500 index sectors sort by 4 Weeks % Change. I sorted by the 4 Weeks % Change to show which sectors have performed the best since the market high back on May 2, 2011. Since the time of the high in the market Utilities, Healthcare, and Consumer Staples have been the best performers. These are defensive sectors of the market that do best when the overall market is going down. This is consistent with the Sector Rotation Model in which different economic sectors under or over-perform the market at different points in a business-cycle. Riskier sectors in the market are likely to do worse at a time like this. Click on table to enlarge.

Market Summary

The chart below is a 6 month daily chart of the S&P 500 showing an approximate 13% rise from low to high while it is up approximately 6% for the Year-to-Date period. What is noticeable about the chart is what is known as an inverted Head-and-Shoulders formation from about the middle of February up to the present. A Head-and-Shoulders formation is a chart pattern with three peaks, the middle peak being the highest, and the other two peaks forming the right and left shoulders. It is a topping pattern. However, an inverted Head-and-Shoulders formation is the opposite as it is an upside down Head-and-Shoulders formation and is a potential predictor of a move to the upside. In this case it predicts an upside move of approximately 100 points or to 1440. Will that happen? We will just have to wait and see. Click on chart to enlarge.

As a follow up to my previous post on the performance of the nine S&P 500 sectors the table below shows the sectors sorted by Volume % Change and what is of note is that the Technology sector shows an increase in volume while the other sectors and particularly energy show a marked decrease in volume. Energy has had a great run but now appears to be selling off in terms of volume inflows. Libya in particular is responsible for rising oil prices and I would not be surprised if the seeming stand off comes to a close soon with the fall of Gaddafi. That would surely bring the price of crude down. Click on table to enlarge.

A further comparison of Energy and Technology sectors shows that Energy is off of its high and that Technology has outperformed Energy in both the 2 week and 4 week time frames. Money rotates from the different sectors and while Energy is and has been the leading market sector on a shorter time frame it may lag allowing other sectors like Technology a chance to play catch up. Click on table to enlarge.

Market Summary

With the end of the 1st quarter behind us I thought it would be a good idea to look at how the different sectors of the economy are doing. In trading and investing, if you pick the right sector to invest in even if you make a bad individual stock pick chances are you will be a winner and can say along with Charlie Sheen "winning". The old saying "a rising tide lifts all boats" can be applied to sector analysis. The S+P 500 is divided into nine sectors that can be followed with the following ticker symbols: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, and XLY. With this in mind I want to identify and take a look at the strongest and weakest sectors and the winner of the strongest sector award goes to XLE, the energy sector. As can be seen from the chart below it has been rising on a steady uptrend with prices well above their 50 day moving average which has acted as support. Click on chart to enlarge.

The winner of the weakest sector award goes to XLF, the financial sector. As can be seen from its chart below it has had choppy moves going back and forth as it has been rising and is currently right on its 50 day moving average at 16.53. As no continued rally in the economy can take place without support from the financial sector the question arises: Is the XLF the "Canary in the coal mine?" or is it simply lagging the broader economy? This is a difficult question to answer and time will tell so we will just have to wait and see. Click on chart to enlarge.

The table below list the performance of each of the nine sectors sorted by Year-To-Date(YTD). As can be seen at the end of the 1st quarter XLE is up nearly 16% while the XLF is up less than 1%. This is the kind of difference that makes all the difference in your trading and investing. For comparison, the S+P 500 is up 6.45% YTD. I hope this helps. Click on table to enlarge.

Market Summary

The Market Volatility Index, known as the VIX, measures the volatility of the market. A recent news story described it as "the options market's gauge of investor fear." Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there's excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poors 500 Index (SPX) bid/ask quotes. The chart below of the VIX shows three notable spikes. The first spike at the end of January is associated with the revolution in Egypt, the second spike with the outbreak of fighting in Libia, and the third spike with the March 11th earthquake in Japan. Click on charts to enlarge.

The second chart below is of the S+P 500. Note how the high in the market corresponds to the second spike in the VIX and how the low in the market corresponds to the third spike. The VIX has declined since its March 16th high and the S+P 500 made its bottom on March 15, the Ides of March, and has risen since then just as the VIX has fallen.

The chart below is of the ERX, the energy bull ETF. Note how bullish this chart looks as it approaches a double top and potential breakout to the upside. If, however, oil prices decline so will this ETF. My feeling is that over the next few days oil prices will decline as the US Dollar strengthens. However, in this volatile world anything is possible.

The table below shows the ETFs that are followed. AGQ, the Silver ETF, is up the most for the YTD period up 40.67% and up a whopping 12.23% for the week. The second place goes to DDM, ProShares Ultra Dow 30. Click on table to enlarge.

Market Summary

The market is set to open higher per the futures market with the major indices all pointing higher. With the outbreak of fighting in Libya oil is currently just under $103 per barrel. This will bring up with it the other commodities as well. The US Dollar Index is currently 75.5 which is down from 76.75 a week ago. As a way to follow the markets I post here charts that I can make reference back to at a latter date. For example, last week I posted the EWV chart which goes up when the MSCI Japan Index goes down. Last week it was 34.70 and it is currently 36.10 though it had been as high as 45.34. Today I want to post the United States Oil chart USO to follow oil prices and the Financial Sector index XLF to follow the financials. Click on charts to enlarge.

As can be seen from the chart above USO has been in an uptrend and is expected to break out to new highs. It has support at the 50 day moving average (Red Line).

The XLF chart above shows a breakaway gap at last Friday's open where it broke above the closing price on Thursday. This should act as support and it is set to open higher.

The performance table above shows AGQ to be the top performer on the YTD basis up 25.34%. For last week the top two performers were UBT and UST, both bond funds, as investors sought the safety of bonds in the volatile market. These, however, are likely to decline next week as investors risk appetite increases.

Market Summary

My thoughts and prayers go to the people of Japan. After an earthquake and tsunami of epic proportions laid waste to cities along Japan's northeast coast the effects on the economy of Japan will no doubt play out for a long time to come. While the recovery will take time how the market reacts to this disaster will be followed closely. The chart below is of the ProShares UltraShort MSCI Japan and as can be seen this ETF, which goes up 200% the inverse(opposite) of the daily performance of the MSCI Japan Index, had been falling for many months until just a few days before the earthquake hit. It will be interesting to watch how high this goes. Click on chart to enlarge.

The table below shows the performance of a select list of ETFs sorted by performance on a Year-To-Date basis. While the table lists UCO, the Ultra Oil ETF, as up 315% I believe that is due to a split in the price and not a true reflection of its performance. Still oil is up significantly. The second listed ETF AGQ is the Ultra Silver ETF up 50% YTD. For the week UBT, the ProShares Ultra 20+ year Treasury bond ETF, was up the most followed by AGQ. Click on table to enlarge.