Archive for September, 2011

Market Turning Points | Andre Gratian | 2011-09-25

Posted in education, technical analysis on 2011-09-25 by Strategesis

From Safehaven.com:

In my newsletter of September 11, I mentioned that the market was just about ready to fall off a cliff. I am not sure if this was the proper analogy but, after a 10-day reprieve, and using the Fed report of September 11 as an excuse, prices broke sharply with some indices already trading at new intermediate lows. I believe that the real reason behind this move is the bottoming phase of the 3-yr cycle and, since its low is not due until the first week in October, we are not likely to see the completion of the current intermediate decline before that date.

The SPX made a double-top at 1220 that created a pattern on the Point & figure chart from which we can estimate the extent of the decline by taking a count across the 1195 line. We come up with two well-defined targets: One to 1080, and the other to 1040. These are in close correlation with Fibonacci projections. With the 3-yr cycle low about a week away, we could not ask for better conditions to predict the intermediate low, both in price and time.

The SPX, along with a few other indices, has not yet broken below the August low, but it’s surely only a matter of time before it does. Some averages usually lead the rest and they can be helpful in forecasting reversals. The Russell 2000 has that reputation and, in retrospect, it did give a small warning when the SPX made a double-top at 1220 and it did not. On Thursday, it broke its low of 8/09 by a small margin while the SPX remained well above. This is probably another indication that new lows are ahead, especially with about another week to go into the cycle low. In any case, I started searching for a leading index that has better predictability than the Russell, and I believe that I have found one that exceeds it, not only in predictability, but excels in consistency as well. Its current technical condition definitely suggests that new lows are still ahead.

At Friday’s close, this lead indicator was essentially near-term neutral, probably because the market will be moved by what comes out of the G-20 meeting this week-end. I am still trying to find the best way to analyze it and on what time frame. For instance, is the warning of a reversal clearer on a daily chart, an hourly chart, or even on a 5-m chart? And is it better evaluated strictly on a divergence basis, or by using Fibonacci projections and retracements? After I have had a chance to evaluate this further, I am sure that I will have gained another very powerful forecasting tool.

Last week, I showed a chart of the Dow Jones Composite. After one more week of trading, it looks essentially the same and has remained above its August 9 low. If the SPX should correct to 1040, the current price ratio between the two indices would put the Composite at about 3400, well above its July 2010 low, and still well within the confines of its up channel. In other words, still in an uptrend, technically, but with the very long cycles bearing down into 2014, it’s probably only a matter of time before a confirmed reversal occurs.

Continued

Technical Damage

Posted in technical analysis on 2011-09-22 by Strategesis

Here are the charts of the major US stock indexes, using daily price bars. They are presented in order from strongest to weakest. If you only considered the Nasdaq, the S&P 500 and the Dow, you’d be much more confident that support at the lows of 9 August might hold. However, the charts of the Russell 2000 and the NYSE Composite Index would strongly argue that support at the early August lows is more likely to fail than to hold—at least eventually, even if it holds temporarily.

Also strongly arguing that support will eventually fail are the Elliott Wave structure, the technical indicators at higher time frames, the break down of key trendlines and the high momentum of the downmove.

Of course, technical analysis can only provide relative probabilities, not certainties. The market is always right. Believe what you see.

NDX (Nasdaq-100 Index) | Daily Bars

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SPX (S&P 500 Index) | Daily Bars

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TMW (Wilshire 5000 / Total Market Index) | Daily Bars

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DJIA (Dow Jones Industrial Average) | Daily Bars

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RUT (Russel 2000 Index) | Daily Bars

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NYA (NYSE Composite Index) | Daily Bars

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The M1 Money Multiplier: Ratio of “bank money” to “base money”

Posted in Uncategorized on 2011-09-19 by Strategesis

From The Federal Reserve Bank of St. Louis:

“Base money” is money created out of nothing by the Federal Reserve–currency plus the funds banks have on deposit at the Federal Reserve.

“Bank money” is currency in circulation plus total customer funds on deposit in demand accounts plus traveler’s cheques.

According to both monetarist and Keynesian theory, the M1 multiplier (bank money divided by base money) should increase as base money increases (as the Fed creates new USD out of nothing.) In view of the unprecedented expansing of base money by the Fed in recent years, the chart emphatically falsifies the theory.

All the Fed’s money creation, and all the Fed’s men, can’t turn social mood positive again:

When social mood is manic, people are willing to loan, to borrow and to assume risk. In such an environment, money pumping gives the illusion of working, because the psychology of the times synergistically multiplies the effect of an increased supply of money.

But when social mood turns negative, people become risk averse, and relatively unwilling to loan or borrow. In that environment, not only does increasing the money supply not work, the huge debts and massive waste of resources on unwise ventures that occurred during the preceding mania not only provide manifest justification to the new risk aversion, they put the whole financial system at risk of catastrophic failure,

August 8, 2011…in an alternate reality

Posted in education, events, market analysis on 2011-09-19 by Strategesis

Had US stocks made new highs on 8 August, 2011, instead of completing a 20% downmove over only 2 weeks, the headlines would have been “Record Earnings Propel S&P 500 To 3-Year High,” “Confident Bond Market Lifts Stocks,” and “Dow Soars On Resolution Of Debt-Ceiling Crisis.”

And each headline would have been a lie—not because there weren’t record corporate earnings (there were,) not because the bond market wasn’t confident (it was,) and not because the debt-ceiling crisis hadn’t just been resolved (it had,) but because the premise that news explains or causes stock price action is false. As is irrefutably evidenced by the fact that the facts about the external world (earnings, bond markets, political events) asserted by those hypothetical headlines were all undeniably true.

Pervasive good economic news has a very high correlation with market tops, and pervasive bad economic news has a very high correlation with market bottoms. For example, compare and contrast the economic news in late 1999 to that in early 2009. Were that not so, economic news would feed on itself, causing both the markets and economy to accelerate ever faster in one direction of the other, with nothing to stop it.

AAPL surges higher, closes above $411

Posted in AAPL, events, stocks on 2011-09-19 by Strategesis

AAPL | Monthly Bars | Mid-1990s to present


(Click on image for larger view)

Trees don’t grow to the sky, but the trend is strongly up. It could easily continue for months yet before any sort of significant downmove.

So much for the idea that AAPL would crash on the departure of Steve Jobs from the CEO post. Moral of the story: Don’t predict how the market will react to news. Let the market tell you what it thinks the news means. It’s always right….

Market Turning Points | Andre Gratian | 2011-09-18

Posted in education, technical analysis on 2011-09-19 by Strategesis

From Safehaven.com:

After making a new high at 1370, the SPX lost its upward momentum and subsequently broke the important 1260 support level. This caused many market analysts to assume that the stock market had started a new bear market decline. I had pointed out previously that, in order to confirm a bear market trend, the index would have to trade below its July 2010 low of 1011. It does not look as if this is going to happen anytime soon. Now, my question is becoming: can the SPX even trade below its August 2011 low of 1101 by the time that the 3-yr cycle makes its low in early October?

A little over two weeks ago, a decline started from 1230 which looked as if it would continue until October and make a new low in the process. With the positive action of the past week, this scenario has come under serious scrutiny. Although a decline should eventually materialize into (about) the second week in October, It is no longer clear that the bottoming cycle will create enough weakness to challenge the 1101 level. In fact, the market is showing enough technical strength to suggest that, after a near-term correction, it might even make a new high before succumbing to the 3-yr cycle downward pressure. I will show you why when we analyze the SPX daily chart.

By Friday’s close, the hourly momentum indicators were overbought and the A/D was showing negative divergence in both indices. However, neither index had given a short-term sell signal. The Point & Figure chart looked as if it might be making a distribution top, but this will only be confirmed if prices drop below 1205. If we have a good opening on Monday, SPX could even run up to 1222 – 1228 before beginning a short-term correction.

With these parameters established, let’s start to look at some charts.

Continued

DJIA E-Mini Futures | 480-minute bars

Posted in technical analysis on 2011-09-16 by Strategesis