Posts Tagged ‘The Fed’
As I mentioned in my entry of June 8th the markets looked prime for a fall. After the Spanish bailout was announced there was a brief rally but the markets then headed lower. Today rumors that the world’s central banks are going to backstop Europe caused the major averages to complete the formation of a bullish inverse head and shoulders pattern on the major indices.
If we use the SPY as an example, the head is at 127.13 and the neckline is at 134.25. A breakthrough of the neckline yields a projected target price of 141.37 which is close to the market top reached on April 2nd. The technical indicators are bullish. The RSI is above 50 and rising, positive momentum is increasing and the stochastic is overbought. The stochastic will stay overbought in rising markets so this rally looks like it is just beginning.
The VIX on the other hand has formed a bearish head and shoulders pattern. The head is at 27.73 and the neckline is at 20.83. A penetration of the neckline yields 13.93, roughly the March 16th low. The RSI is below 50, the stochastic is weak and on a sell signal and the MACD is turning down with increasing negative momentum. There is support at it’s 50 day ma which is where it is resting now and uptrend support at 19. A nice breakdown below both levels would confirm the uptrend in the overall market.
The markets are obviously anticipating a huge coordinated worldwide central bank move regardless of what happens in Greece over the weekend. Even the central bank of Canada checked in on Friday. If things don’t work out as planned however the markets could take a nosedive. Therefore we are either looking at S&P 1400 or S&P 1200 in the near future.
Gold has been acting bullishly ever since it bottomed in May. GLD is at the crossroad of the downtrend from the March major top and the intermediate minor tops. There has been talk that collateral for bailout funds for European banks will at least be partially backed by gold. If true this is an admission by central bankers that gold is a valuable asset such as real estate and this action can only be bullish for gold. If GLD can break through the current down trend resistance it should make a run to at least 174.
Conclusion: Right now is a dangerous time for both bulls and bears. If the central banks come through with their plans to prop up the European banks with liquidity the bull market should resume. If they fail to act then my original projection of S&P 1200 looks like it will be in the cards.
I seriously doubt that central banks and the Fed will allow the world financial system to fall apart so consequently they will do whatever is necessary to prop it up. My impression is that the market wants to rally and the correction may be over. All we need is some good news out of Europe and another round of QE3 to get the markets moving in the right direction.
The short covering rally this week basically defined the upper levels of the downtrend channels that the major averages are locked into. Aside from a technical bounce off the SPY 200 day ma at 1278 that coincides with the bottom of the channel, there was the hope that either the Fed or the ECB would come to the rescue of the markets with more quantitative easing. Since neither event happened we are now back to the possibility of a financial meltdown in Europe, a severe slowdown in China and a recession in the U.S. Bear market rallies are based on the slope of hope whereas bull markets climb a wall of worry.
The S&P hit the upper descending trend line of it’s downtrend channel yesterday and then again today. This area coincides with the neckline of the head and shoulders top and is an area of both strong horizontal and downtrend resistance. The stochastic is almost in overbought territory and the RSI is right at the midline where it would be expected to turn down in a continued downtrend.
and DIA are exhibiting almost the exact same chart formations.
Another technical indicator that we should look at is the ATR or average true range, a measure of volatility. If we look at the weekly chart of the S&P 500 we can see that the ATR declines on uptrends and forms rounded bottoms at market tops. It then moves up significantly on market declines as happened in 2010 and 2011. Right now the ATR is forming a rounded bottom and starting to curve up.
This is even more pronounced on the daily chart as the ATR is still rising even though the market is rallying. While past performance is no guarantee of future performance, the implication of this chart is that the current rally is merely a counter trend bounce and the market has not seen the final panic dump that signifies a true bottom.
If the ATR starts to decline while the market continues to rise past the head & shoulders neckline and on strong volume then that would be confirmation of a bullish trend reversal. Right now that prospect does not appear to be in the cards.
The market also rallied between May 21 and May 29 but the ATR dipped slightly and then kept rising. The rally ultimately culminated in a sell off. We appear to be in the same situation but the potential decline from this point on could be much greater.
Technical indicators are for the most part bearish. While the S&P has moved back above it’s 200 day moving average, the 50 day ma is curving downward and would act as major resistance assuming the index can even get that far. The MACD is underwater and while it has given a buy signal positive momentum appears weak and volatility is increasing. Volume on down days is for the most part greater than volume on up days.
Conclusion: Fast, sharp rallies such as we have seen this week are typical of bear market rallies. While it is unclear if we are in a bear market we are at least in a sustained downtrend. China is going to announce economic numbers on Saturday and Spain is going to ask the eurozone for help over the weekend. The Spanish banks have been rallying this week as evidenced by the etf EWP. This implies that a bailout of their banks has in all likelihood already been priced into the market. China’s economic numbers are allegedly going to come in weak. Therefore we may very well be in a ‘sell on the news’ environment regardless of what that news is.
The VIX has formed an inverse head and shoulders pattern. The pattern does not come into play however unless the neckline is penetrated. If the neckline is penetrated the target of the VIX is 27-28. This would correspond to the S&P 500 dropping to about the 1250-1275 area. The question is does it look like the neckline is going to be penetrated.
We can see that the VIX hit resistance at it’s 200 day EMA of 21.64. This also corresponds to the neckline of the pattern. There are negative divergences forming which indicate that the VIX should drop. The VIX hit a higher high between April and May but the MACD and stochastics hit a lower high. The MACD momentum bars were much stronger in the initial run up that started in April but the bars in the current cycle are much weaker. The RSI is also decreasing.
This would indicate that the VIX is going to pull back. It could pull back to it’s uptrend line and then create another right shoulder or it could drop through the uptrend line and negate the pattern. In any event the market should move up from here. If the VIX were to negate the pattern the S&P 500 and other market indices would in all likelihood resume their uptrends.
The SPY daily chart confirms the VIX chart as there are positive divergences indicating the SPY should head higher. The SPY hit a lower low between April and May but the MACD negative momentum bars are weaker in the current cycle indicating that negative momentum is waning. The RSI is at the same level that it was in April when the market rallied and the stochastics are oversold.
The SPY weekly chart still looks bullish. The SPY has pulled back to it’s 20 day EMA where it has found support. This level orresponds to the 2011 market top which is also acting as support. The RSI and stochastics are still above 50. The MACD has given a sell signal but if the rally continues that should quickly reverse. As long as the RSI and stochastics turn around above 50 the rally should continue.
There are numerous wildcards in play that could influence the market direction.
1) Good or bad news out of Europe and China.
2) The announcement of QE3 by the Fed or ECB.
3) Natural or man made disasters.
Conclusion: The technical indicators are pointing to higher market prices at least in the near term. It remains to be seen if the market can break out of the trading range it is in namely S&P 1340-1400. A VIX surge past 21.64 however would be an indication to at least hedge any long positions or go outright short.
Above we have the 5 year chart of TLT, the Ishares 20 year treasury bond fund. The first thing we notice is that TLT may be double topping as it hit a slightly higher high than it did at the end of 2008 and it has now pulled back. Let us now compare it to where the S&P 500 was during these top formations. At the end of 2008 the S&P was in the 800-900 range. The S&P is now in the 1100-1200 range. This would seem to indicate that most of the money that has been piling into treasuries has been coming out of foreign markets. If TLT has double topped it could indicate that money is ready to flow into the U.S. stock market.
I have also drawn trendlines from the market top of 2007 to the current top of 2011 and fan lines from the market low of 2009 to points where the uptrend broke. So far we have had a break of 2 fan lines. It is generally considered that a break of the 3rd fan line is fatal but so far that one is holding up. The current trend along this line also looks similar to the one that occured in mid 2010 as the market bounced off that fan line and then started to move up.
The VIX also looks like it may have double topped at 48 but it has been staying persistently high since August, hence the huge swings in the market.
Conclusion: The stock market is at a major crossroads. There are a lot of negative technical indicators overhanging the market and the shorts are piling on to positions. We are heading into October which is generally feared but the fact of the matter is that statistically September is the worst month for stocks and not October. The market also has a tendency to frustrate the multitude.
There has been some recent positive economic data coming out of the U.S. in regards to employment and the Chicago PMI which seem to indicate that the U.S. economy is not falling off a cliff. The fact that bonds have rallied to their 2008 highs while the U.S. stock market is still way above it’s 2008 lows is another positive indicator.
China’s growth rate has been reduced from 9.6% to 9.5%, hardly the indications of a meaningful economic slowdown. The Fed has already revealed it’s hand with persistently low interest rates, Twist and the statement that it might do further monetary easing if necessary. Therefore the focus is on Europe.
If Europe can get it’s act together quickly and construct a meaningful financial back stop for the sovereign debt crisis that is emanating out of Europe then there is the possibility of an upside market surprise. If the S&P can manage to break through 1230 the shorts will be forced to cover sending the market even higher. A break below 1100 however would be bearish and confirmation that we are in a bear market phase.
If you’re a trader one possible way to play this market would be to buy out-of-the-money calls above 1230 and out-of-the money-puts below 1100 dated at least through November. That way whichever way the market moves the overall position should be profitable.
The recent massive sell off in both gold and silver formed a recognizeable chart pattern on both assets.
After double topping, GLD has now formed a large bull flag correction pattern. GLD also pulled back right to it’s uptrend line from the February, 2011 low. This would seem to indicate that the cycle low for gold has been reached and it will now consolidate within the bull flag pattern. A drop to the rising support line should be viewed as a buying opportunity but it couldn’t hurt to accumulate GLD within this range if you don’t already own any.
SLV is exhibiting a similar chart pattern although it hit a lower secondary top and has been correcting for a longer period of time. SLV did not quite make it to it’s uptrend line from the 2008 bottom. SLV could possibly work it’s way down lower within the bull flag to meet the rising uptrend line but I suspect the cycle low for SLV has been made. Since SLV has been correcting longer, it will in all likelihood break out to the upside before gold does and will lead the charge in the next leg up for precious metals.
Right now the markets are in turmoil and the economic futures of Europe, the U.S. and China are unclear. It appears that the central banks of the world will have no choice but to flood the markets with liquidity. The Fed has stated that further intervention may be necessary in the near future and that can only mean one thing: increase the money supply. The ECB is also about to drop interest rates and will have to perform monetary easing in order to bail out the Euro Zone.
The Dollar has exhibited some strength lately but it has not by any means bolted out the door. While the downtrend from the January top has been broken and UUP is trading above it’s 200 day ma, it may be forming a small head and shoulders pattern. There is also immediate downtrend resistance at about 22.75. In any event the recent sell off in commodities would indicate that a stronger dollar in the short term has already been priced in. The dollar is in a long term bear market and even if it rallies in the short term it is ultimately headed lower. The U.S. cannot afford a strong dollar at this point so Ben Bernanke will be forced to do whatever is necessary to keep it weak.
Conclusion: The fundamentals for owning precious metals seems stronger than ever. Central banks will have no choice but to keep interest rates low and print money. The current correction in gold and silver should be viewed as a buying opportunity. Precious metals appear to be one asset class that can be bought and held for the longer term.
In regards to the broader stock market, there are a lot of negative technical readings on the charts but the floor at S&P 1100 may be the low for this cycle. There are still a ton of bears out there and everyone is expecting the market to fall apart. It is unclear if the current correction is like the one we saw in 2010 or if we are heading into a 2008 scenario.
September is typically the worst month for stocks and it is just about over. If we can make it through the end of the month without experiencing a complete breakdown there could be an upside market surprise heading into the fall. Some indications of this would be Europe getting it’s act together, the U.S. leading indicators not pointing to a recession, further Fed action, and China not coming apart at the seams.
The above chart is that of the S&P over the last 20 years. The 3 indicators below the chart are Williams %R, MACD and Stochastics. As can be seen, the MACD is in a well defined downtrend channel where the tops correlate very closely to the market tops of 2000 & 2007 and the bottoms correlate to the market bottoms of 2003 & 2009. The MACD is currently finding resistance at the top of the downtrend channel and looks like it is about to give a sell signal.
Assuming this pattern continues, it looks like the rally from the March, 2009 lows is over and we have entered a bear market phase. In order for this to change, the market would have to stage a strong rally pushing the MACD above the upper downtrend line. Based upon the current macro economic environment the chances of that happening seem unlikely.
The MACD peak also corresponds to a period of global uncertainty. With European economies on the edge, France and Germany have made it clear that they are not going to immediately back stop the Eurozone. According to the Fed, the U.S. economy is going through a protracted weak period although certain recent economic data suggests that some areas of the economy may be improving.
Conclusion: Barring a rally that can bring the S&P back over it’s 50 day ma where it can sustain itself, it appears a bear market phase has begun.
The U.S. government at the absolute last minute agreed to an increase in the federal debt ceiling. The result wasn’t just sell on the news, it was sell more on the news. The markets appear to have no confidence whatsoever in our government officials and for good reason. To allow a critical decision like this to wait until the last minute for a resolution is a fool’s game. Unfortunately that seems to sum up the political capacity of our elected leaders.
As I indicated in my entry of June 21 a possible head and shoulders pattern was forming on the S&P 500. Then in my entry of July 14 I indicated that an inverse head and shoulders pattern appeared to be forming in the near term. We can now conclusively say that the inverse head and shoulders pattern has been negated and there are fully formed head and shoulders patterns sitting on the S&P and DOW.
Just because a head and shoulders pattern has formed on the major averages does not mean the market is going to drop further as a reversal off the neckline is bullish. In order to find out where the market may be headed at least in the short term we will look at various charts and technical indicators.
The S&P has dropped slightly below it’s 50 day EMA and is sitting right at the neckline of the H&S pattern. RSI at the top of the screen is in a downtrend and has not hit the bottom of the channel nor is it at oversold levels. The MACD looks like it may be turning up near the 0 level. The bottom indicator is Williams %R, an indicator that uses momentum to measure overbought/oversold levels. Readings below 80 indicate oversold levels. Right now it is reading 99.99 a condition that is extremely oversold. The last time it hit this level was in March, 2009 just prior to the start of the bull market. Also each time it has dropped below 80 since March, 2009 it has indicated a near term market bottom and quickly reversed upward.
If we take a look at the DOW the picture is almost identical except it hasn’t quite hit it’s 50 day EMA.
The U.S. dollar has formed an uptrend channel. There is a downtrend line from the May, 2010 top that was briefly broken through in July but the dollar retreated to the bottom of the channel. That downtrend line now coincides with the 20 day EMA which has acted as near term resistance.
Gold has been on a rampage but appears to have hit an intermediary top. A look at the chart shows that it has rallied right to the top of a huge ascending wedge pattern. A breakthrough of the top line would be incredibly bullish but this line should act as strong resistance. The RSI is in overbought terrritory as is Williams %R. Each time the RSI has moved into overbought levels it has tended to either quickly pull back or consolidate for awhile. (Note: In after hours trading gold has traded above the upper trend line. It remains to be seen if this will turn into a confirmed breakout.)
Conclusion: From a technical perspective the markets appear to be at a reversal point. I would expect a bounce in stocks and a pullback in gold. The current economic outlook appears to be deteriorating but the market looks like it has already factored that in.
The bull market since March, 2009 has been earnings driven. If earnings start to trail off then the market will correct for that. The U.S. dollar is in the dumps and there no longer seems to be a direct correlation between a weakening dollar and a rising stock market. Gold and bonds are acting as the risk off trade as opposed to the dollar. If the dollar can manage to rally it might be good for stocks as it would indicate that the U.S. economy is experiencing a sustainable recovery but the fundamentals do not appear to confirm that view. There is always the possibility of a QE3 which would put even more pressure on the dollar and further inflate the price of gold and other commodities.
It is too soon to say whether the bull market cycle is over or that a bear market cycle has started. It is also unclear how a continued weakness in the dollar will affect stock prices as this could have a tendency to inflate them along with commodities. We will probably have the answer to these questions within the next 3-6 months.
The SPY and EEM have just broken out indicating the worldwide stock markets are heading higher.
The SPY broke out of the downtrend channel that has been in effect since the middle of April. The breakout looks strong as both the downtrend and the 20 day EMA were penetrated with the MACD turning up at the 0 level and the RSI breaking through 50.
At the same time EEM gapped up strongly above it’s 50 day EMA. While the 20 day EMA is still below the 50 day EMA it is turning up. The MACD is also turning up and the RSI broke through 50.
Conclusion: As I mentioned in my post of May 27, the U.S. dollar is in the dumps. Congress has also failed to raise the debt ceiling putting even more pressure on the dollar. It therefore appears that the carry trade is back on: sell the dollar and buy everything else. The S&P 500 looks like it’s heading to the 1425 area with EEM heading towards a triple top at 50. Commodities and high yield bond funds should also continue to move higher.
Obviously there is a huge gap between Wall St. and Main St. The U.S. housing market is in a double dip although it never really had a recovery. Unemployment remains high at the same time corporations are turning in record profits. While it is unclear what Bernanke is planning to do, Congress is playing a dangerous game by using the debt ceiling as a poker chip. Barring an actual debt default by the U.S. government, the key to bull market longevity is corporate profits. As long as they continue to rise the stock market will follow.
The U.S. stock market has broken through the neckline of the inverse head and shoulders pattern that I outlined in my entry of April 21, 2011. It would be nice to see a re-test of the S&P 1340-1350 level as that would give traders confidence that the neckline will hold as support. Since the 1250 level was never re-tested, it’s possible this market may just keep heading higher. Any pull back should be viewed as a buying opportunity.
GLD has broken out to new all time highs. The nice thing about GLD is that there is no overhead resistance as no one has ever paid a higher price for it. GLD has moved into the next upper parallel channel as outlined in the above chart. A move to the top of that channel would bring it to about 153 which is the projected price target of the inverse head and shoulders breakout that I outlined in my entry of April 12, 2011. Any pullback in GLD should be viewed as a buying opportunity.
Gold miners have been lagging the price of gold but are in the process of catching up. One would think that with the price of gold soaring the miners would also be heading straight up. One factor that may be dampening their price action is the fact that oil has also been moving up, as oil is a critical component of ore extraction operations.
In spite of that GDX has formed a bullish cup and handle formation indicating that the gold miners are about to break out to the upside. The projected price target of this formation is about $76. A break of the downtrend line on the handle is a clear-cut buy signal.
Fed Chairman Ben Bernanke spoke today. While he did say that QE2 would end in June, he also said the Fed would continue to reinvest maturing debt. In any event interest rates will continue to stay low and some sort of quantitative easing will remain in place. All this bodes well for the stock market.
Now that the Republicans have taken over the House of Representatives we should experience a heavy case of legislative gridlock for the next 2 years. There are unintended consequences to every action and the unintended consequence of this election is that a significant portion of U.S. economic policy will be determined by a single individual. That individual is none other than Fed Chairman Ben Bernanke.
Regardless of what one thinks of Mr. Bernanke and his policies, the fact of the matter is that the Fed Chairman is the only public official with a clear vision and well defined plan of action. So far his plan has been working as none of the predicted negative side effects of his actions have taken place.
We were guaranteed that interest rates on treasury bonds would be soaring by now but instead they have been dropping like a rock. We were guaranteed that hyperinflation would take hold but instead there has been almost no inflation at all and deflation fears still abound. We were guaranteed that asset bubbles galore would be formed but so far asset supply has kept up with demand and in some cases like gold demand is far greater than supply. What the long term effect of Fed policies will be are still unclear so it is pre-mature to assume that they will somehow doom the world economy as various economists and pundits seem to think.
Furthermore the U.S. economy seems to be improving in certain areas. Ford sales are sky rocketing and their primary market is the U.S. consumer. Apple is also booming selling expensive electronic equipment to worldwide consumers. GM cars are selling like hot cakes in China. Of course if one is unemployed this news does not make things better as improvement in employment is one of the last things to happen after a recession.
It is also normal after a recession for a certain segment of the working population to have to retrain into other fields of work. While everybody was so concerned about getting a college degree, it turns out that many high paying blue collar jobs cannot be filled as there is a lack of properly trained workers in these fields. I suspect over time that the employment situation will eventually balance itself out as trained worker supply will be created in order to meet employment demand.
The bull market in Gold has been confirmed as it broke out to new highs on a huge gap up on Thursday and closed even higher today. GLD is testing the upper trend line of it’s 2 year uptrend channel and on high volume. It looks like $1,500. an ounce gold is going to arrive sooner than anyone anticipated. While it could head straight up from here, there’s a good chance we will see a consolidation before another major move up. In any event GLD should be bought on any pullbacks.
The SPY has closed above it’s April 26 high indicating the bull market in stocks is continuing. After the huge move up on Thursday it looks like a flag could be forming. The ideal buying opportunity would be if SPY consolidated in this area until it’s rising 21 day moving average hit the breakout line but I wouldn’t necessarily wait for that to happen to go long in this market.
Technically the market is extremely strong and we should expect higher prices as the next major area of resistance for the S&P is around 1300. Good retail sales numbers in the upcoming holiday season would certainly be a positive catalyst for the market.