Monday, October 19, 2009

Morning Update/ Market Thread 10/19

Good Morning,

Equity futures are slightly higher this morning after being down most of the evening. Below is a chart of the overnight action on the /YM and /ES:

The dollar is down once again, especially against the Australian dollar, and is now residing in the 75.50ish area. Oil and gold are both close to flat, as are bonds.

No economic releases during market hours today, this evening and tomorrow we’ll get housing data and the most important release for the week, from my perspective, will be the PPI tomorrow. Otherwise, not a big week data wise.

That certainly doesn’t keep the media quiet, oh no, they are already pumping up the economy… Bloomberg, for example, has an article this morning stating that retail sales are looking better than expected! Really, that’s funny as I didn’t know that retail sales were released on weekends, lol! Reading the “article” they were doing their best to set expectations higher and were using Intel’s comments made nearly a week ago to prop up their argument on why the consumer was losing their “bunker mentality,” and back to more normal shopping patterns. I like to see articles like this as it means we are getting to the psychology found near tops.

The wave count, however, does indicate that there is likely more to come before the rally is truly buried. It would appear that the early part of last week was wave 1 up of the final wave up, and that we got a large portion of wave 2 out of the way as well, if not all of it. That leaves us with c, d, and e, the 3rd, 4th, and 5th waves higher of the final leg of c up of B up to go. Again, the final wave up can be tricky to play as it can extend or truncate.

On Thursday the percent of stocks above their 5 day moving average diverged bearishly from price, but then on Friday the exact opposite occurred, with stocks above their 5 dma rising bullishly against prices.

Looking at the weekly candlesticks, I could see no sign of anything significant in them, they are not yet screaming “top” at me, although the bearish divergences are getting larger and are numerous. The most glaring of which is volume, and McHugh did a good piece on that this weekend showing the volume patterns at the ’07 top and just prior to the ’87 crash – this volume divergence is much, much LARGER and more pronounced than either. He then did a comparison of those two time frames to now showing the divergence in MACD – again, way larger divergence now. Same for the divergence in the advance decline line (showing a lack of breadth), and I’m also seeing divergence in the stochastics as well.

All that said, I’m still being patient and just tracking that rising wedge, it’s a classic formation and it’s perfect, supported by the decreasing volume pattern. Below is a chart of the DOW showing that wedge… note that we are now overbought on the daily, weekly, and monthly stochastic:

On Friday we made an island reversal on the XLF. The XLF is higher this morning, but watch and let’s see if that island holds, it’s very bearish if it does:

TLT put in what appears to be an inverted bottom looking hammer on Thursday, and then on Friday put in an upright hammer higher. This needs to be watched as rising bond prices can hamper stocks (capital flow), and TLT is channeling higher still, having failed so far to break the lower rising uptrend line:

That’s about all I have for now, I hope everyone had a great weekend… I went over the beautiful North Cascades highway this weekend in the pouring rain which was terrific as there were waterfalls spilling off the mountains everywhere with the fall colors as a backdrop. It is definitely the season for waterfalls alright… why it’s so beautiful that it’s comparable to a never ending increase in retail sales, what a daydream!

Lovin' Spoonful – Daydream: