Market Observations: 03 October 2011

Given we have just ended a month, time to see where we are in the big picture.

Equities

Monthly View: Looking at the monthly here, because we have just ended a monthly candle, and all seems to be pretty bearish. The market looks to have put in an intermediate top here at 1370. We have now had 5 consecutive down months, and have definitively put some distance from the trendline break that took place last month. I do believe that we will trend lower to that July 2010 low in the 1010-1050 area, and the action there will be critical. It is looking very very ominous from an Elliot Wave point of view; the cyclical bull market that may have ended at 1370 is displaying many characteristics of a 2 wave: Tracing 3 waves instead of 5, rising to a fairly high level to serve the purpose of goading the majority of people into thinking that the economy has in fact recovered from the depths of 2008. I am not an EW guy, but I do keep its principles in mind when doing my analysis; Daneric runs a fantastic blog which is probably the best EW blog on the internet. His analysis of social mood have been very enlightening to me as a trader. But according to the guys over there, we are in for a massive massive drop, and 400 could be on the cards. First things first though, on the monthly, a close below the July 2010 open of 1032 is imperative for this bear market to kick into high gear. If not, the bulls and the optimists may have found themselves a temporary reprieve.

Trading levels: 1221,1365 above, 1010-1050 below.

Weekly View: Very interesting developments on the Weekly chart from a technical point of view. First, we can see more clearly the trendline break that occurred in early August. The first horizontal line is at 1216. This has been an extremely important level for this index since 2008. It was from here that the market really nosedived after the weekend which saw Lehman go down. April 2010 saw the market return to that level for the first time, where it failed spectacularly and ushered in a volatile spring/early summer that included the May 6 flash crash, acceleration of the European debt crisis and increasing spikes in commodity prices. The market sold off to a 1010 low before reversing sharply, and we rallied from there to topple that 1220 area and finally go higher.

The 2011 breakdown of the cyclical bull market trendline also saw the market slice back through the 1220 area to the downside, then after its low at 1100, it went back to retest 1220. Clearly this is a massive level and has provided plenty of supply for the market. The engulfing bar on teh weekly at the retest followed by the hammer to the downside is confirmation of that mountain of supply that still exists there. I’ll be surprised if the market retakes that level.

Trading Levels: 1216 above; 1124, 1062, 1024 below.

Daily View: Even though I expect a breakdown of 1120, it must actually happen first. We mustn’t get ahead of ourselves here. The daily clearly shows that we are still in a clearly defined range, and it seems prudent to hold off on acting in a big way until this range is resolved one way or another. The action on higher timeframes does suggest resolution to the downside, as does general conditions, but we cannot be certain until it happens. The open on Monday should be interesting.

Trading Levels: 1176, 1204, 1214-1220 above; 1120 below

Bonds

10 Year UST


Monthly View: Multi decade view in order to see the BIG picture. We can see that it may involve lower yields on the 10 year even though the fundamentals are completely terrible. Any investor loaning the US government 10 money for 1.92% is making a foolhardy bet, to put it mildly. Inflation is running at 3.8% as per the latest CPI release from the BLS. To hold for one year has you already falling 1.9% in the red on your investment. Should rates continue to plunge, you will make money on the capital appreciation, however holding to maturity means you will not see any of that capital appreciation. Thus, any investor who is holding to maturity is guaranteed to lose money in these conditions. The only way to make money is to do so via the capital appreciation. Buy at 1.9%, sell at 1.7%. That the market is trading in such a manner that defies the fundamentals suggests this is a bubble market. If we are in a bubble (and I strongly believe we are), prices are already in the realm of the absurd, and 10 year prices can rise even higher. I don’t plan on trading the long side here, only to seek out when this bubble will pop, and slowly pile in on the downside. There is nothing to suggest that this has occurred technically, so for now I’m looking to sit tight and continue observing.

Weekly View: A closer look at that channel here on the Weekly chart. If stocks continue to slide, we should see a retest of that low at 1.7%, and the action there should be interesting. Technically, there is nothing to suggest a reversal is on, although it will probably be more apparent on a smaller timeframe such as the daily.

Commodities

Oil



Monthly View: A look at the long term view of the WTI price. Very interesting development, with the trendline that began at the 1998 low of $10/bbl. It was broken in the 2008 crash, and retested it nicely in spring 2011 and promptly sold off with a nice engulfing. There is plenty for bears to point to in making a case for lower prices, and I’m intrigued. I’m bullish when looking at fundamentals, but the main one is action from Ben Bernanke. At this stage he is sitting on his hands, and should he continue to do so, the bearish argument will reign supreme. Strictly sticking to the price action, the bears must negotiate the $59-70 demand level successfully in order to really push things lower.

Weekly View: A closer look at where we are. Nearing a pivotal point.

Copper

Monthly View: Copper is probably the most talked about commodity, mainly because of its predictive nature with respect to the economy. I am bullish for the long term, and this chart shows why. After the plunge in 2008, prices rose past the peak of 2008, which has not yet been seen in the WTI price. This suggests that we are still in a bull market for copper and merely correcting. However a break of the level we are approaching (2.65-2.90) will be detrimental to that bull case, as there is little demand below until the 1.5 area. All of the sentiment is bearish, gloom and doom, which may mean a bottom is near. It wouldn’t be wise to act upon such a call without corroborating price action, so prudence is required.

Trading levels: 4.5 above; 2.65-2.90 below

Gold

Monthly View: View of the entire bull market to date, with a channel around the most recent leg. The actions of the last few weeks have merely been the reaction from the top of the channel to the bottom.

Weekly View: A better view of the latest leg of the Gold bull. As stated before, the move to 1923 was frothy, as it briefly exited the channel before being pulled back in. It reacted, kissed the bottom of the channel which coincided with a key demand area representing a fantastic buying opportunity in my view. Last week in my Market Observation I did recommend buying at these levels, with tight stops. This week will be key in my view, with a follow through needed to confirm a bottom after the nice hammer candle of last week.

Currencies

EUR/USD

Monthly View: Looking bearish here on the monthly, with the market in a clear bear period. The first level of demand looks to be the 1.29 lows of late 2010. Overall, the chart looks bullish. The action from the 1.60 peak definitely looks like its corrective in an Elliot wave sense, although that does not preclude a drop to much lower levels from here, given the relative strength of the dollar and European Debt Crises worry in recent times.

Trading Levels: 1.4816 above, 1.2984, 1.2241 below

Weekly View: Overall, this chart is very choppy and seems rangey. We do have a basis to work from however, noting the drop from the approach of the 1.50 supply level.

Trading Levels: 1.38, 1.4490 above; 1.289, 1.267, 1.1927 below

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