Monday, November 9, 2009

Technical Update…

Quick update due to the decline in the dollar and new high made in the DOW Industrials…

I would first like to point out that the IMF, the world bankers, this weekend talked down the dollar while the G20, many of whom are the same central bankers, talked up the strong dollar policy. Meanwhile they reiterate their never ending stimulus ways. Is it any wonder that the dollar is sinking? To those who say that ½ or even 1% currency moves in a day are no big deal, I will simply remind them to look at the dollar action prior to the crash of 1987.

Can you imagine the government coming out and placing a 16% tax on everything you own and every dollar you hold, just for this year? Well, from the dollar’s most recent peak in March of this year, the dollar is down 16.4%, it is down more than 8% since the beginning of the year! Thus, if your dollar based assets and cash holdings exceed your stock market holdings by a great degree, as is true for the vast majority of Americans, then your real net worth is still going down. If you’re one who is gaining from this stock market melt-up, then you are a big time risk taker from my perspective, as the divergences in the market are huge and are growing larger. At some point, a declining dollar will hurt equities, do not be fooled by the soothsayers who chant that a falling dollar is “good for exports.”

We have an interesting situation between the Industrials and the Transports in that the Transports had made a new low, but the Industrials had not. Now the Industrials have made a new high, but the Transports have not. That’s a potential Dow Theory non-confirmation set up once again, something I will be watching.

Below is a 6 month daily chart of the DOW Industrials. The volume pattern is overall extremely bearish, in fact a historic bearish divergence. The latest downtrend was once again on higher volume, while the most recent uptrend is on lower volume – again, volume confirms price. Note the RSI… at each peak the RSI’s peak is lower than the previous. Now we are making another new high, yet the RSI is not nearly as high as the last peak or the last time that we were in this position, a large bearish divergence, the last time I saw one this large on the daily timeframe was at the ’07 top. The same RSI divergence is occurring on the weekly timeframe as well, the peak in RSI occurring the second week of September, nearly two months ago. Today’s daily bar closed above the upper Bollinger Band, and it did close above the bear market downtrend line the way that I have it drawn (there’s another one further out, drawn on the candle wicks, not the bodies). The Industrials did break that same line several times during the Great Depression, so I don’t think that’s too important technically and the larger indices have not:

Here, you can see that the Transports made a new low and have so far not made a new high. Divergences also abound here, as they do in all the indices. The Industrials are the only index to not break the rising wedge, but only with the logarithmic function turned off as is the case in the previous chart. Most of the other indices have reentered the wedge, the exceptions being the NDX and the RUT. I note that at the 2007 top, prices fell below that rising wedge, but then slid back along it to new highs in the DOW before rolling over. The fast stochastic is again overbought on all timeframes:

The NDX and the XLF both left sizable gaps below today’s candles. Those gaps will be filled sooner or later.

On the DOW Industrials, the new high eliminates the possibility that wave C down has begun in that index. Thus, Elliot Wave rules tell me that I was wrong to believe we had made wave 1 down and are now making wave 2 up, at least in the Industrials. That’s all I need to know to go back to sitting on my hands and waiting patiently. I guarantee you that I have more patience than Goldman has quant computers. No need for panic on the part of the bears, the fundamentals are well on your side as are the technicals. Now, many are going to decry the technicals as no longer working. To which I say again, patience. This reminds me of the signs of a bubble; the wise market observers trust the historical references and are gone. It is the new money that remains, and eventually they will all be caught at the exits at the same time. Patience, all the divergences WILL RESOLVE, the further out they are, the more likely the real correction will be swift and very painful.

Oh, and one more development is a sell signal on the weekly MACD indicators as pointed out by McHugh. The MADC rose into the same extreme overbought region as the 2007 top and has produced a sell signal despite a rising market, the same divergence produced then. Yeah, it’s a big bad scary market, if you’re in it. I still say that being in is nuts, let the criminals have their fun, history has a way of catching up to them, and averages are averages because as much time and deviation is spent below the line as is spent above… no one, not even the inventors of derivatives, can create valuations that go on forever, any more than someone has invented a machine with perpetual motion.

While the top may still not be in, if you are playing for the odds, you will remain calm and not jump to any undue emotional conclusions. Hey, if you need to, just take a drive out into the country to clear you thoughts…

Three Dog Night - Out in the Country: