Monday, June 7, 2010

Morning Update/ Market Thread 6/7

Good Morning,

Equity futures are higher this Monday (hence forth to be known as Wave2day). The Euro started off lower yesterday afternoon but has bounced back to very close to break even.

Below is a daily chart of the dollar on the left and Euro on the right. The dollar is now right up against a major resistance line in the 88 area. Note the small triangles that were broken on Friday, the minimum target on the break is well above the resistance line at about 89.5, so it would take a failure of that minimum target not to reach it. If you count that triangle as a pennant, it could be targeting as high as 94:

Now let’s take a look at a 10 year chart of the dollar to show you a resistance line that the dollar is currently up against. This is a pretty major junction, a break above that line would signal a major uptrend for the dollar and would likely be quite negative for equities:

On the other hand, below is a chart from showing that the last two times the dollar reached this area a sustainable low in equities was put in:

I think it breaks above that area, but it may not do it right away. More evidence that dollar resistance will not hold is found in the currency P&F charts. Below is the dollar P&F that shows an adjusted target now of 114!

The action in the Euro has triggered a new target on the Euro P&F diagram that is well below parity, all the way down at 88! That is a very major move should that target be reached, but there is precidence as the Euro was in that same region in the 2001 - 2003 timeframe:

The Head & Shoulders pattern I’ve been showing has a weak right shoulder, so it could be that we still need a bounce higher to finish that up:

That H&S pattern is not very well formed on the right side, but it doesn’t have to be. And, as I look around at other indices, like the Transports, I see that it’s even less well formed which leads me to believe that we likely will not go all the way up to form a more perfect right shoulder. And the Elliott Wave count suggests that it’s most likely getting close to rock and roll time.

The economic data is light this week, we’ll get Consumer Credit this afternoon.

Officials from Hungary are trying to smooth over their prior talk of default now saying that they are not as bad off as Greece! Riiiiggght. Which version do you believe and do you have confidence? What you really need to be asking is WHEN they default, who is going to eat the loss? All of the sudden Germany doesn't look so strong relative to the PIIGS.

The same resistance and support levels are in play, SPX 1,070 is overhead while 1,040 is the neckline support area.

Friday’s powerful down stroke could easily be the beginning of wave 3 of 3 down… that makes any bounce today wave 2. Friday’s move had what I think may be a record amount of volume on the downside, coming in at 99.1%! That means that effectively ALL the players in the market were selling. How many players is that is the question! Is it effectively four? Ten? I don’t think it’s many.

I learned something from watching some old archive footage of Martin Armstrong this weekend. He did a study in the early 90’s looking at the number of stock holders of record versus the movement of the broad market. What he found was the opposite of what you may think to be true – that at market tops there were far fewer owners of stock – they consolidated into a few hands. And at bottoms there was broad ownership – far more owners than at tops. While I don’t have data regarding ownership, and the whole stock ownership trail has become completely convoluted today, my suspicion is that there are very few market participants and that in fact stocks are highly concentrated into just a few players hands. That is dangerous as the “Flash Crash” proved.

I’ve also been warning that the number of 90%+ volume moves is a warning sign. McHugh picked up on the same thing and this weekend proposed that the fact that we’ve had twelve (!) 90%+ day moves since mid-April is the same exact type of warning as a Hindenburg Omen.

First of all, let’s note that there just hasn’t been enough time to generate the necessary new lows and highs combined for a Hindenburg. But at the root of the Hindenburg is a divided market, one that has internal splits with some sectors that are unhealthy while others are being bid up. And now we’ve had eight 90% down days and four 90% up days. That is a split that is dangerous and those lopsided moves add credence to the theory that there are fewer participants than is required for a healthy market.

Get below 1,040 and it will be painfully obvious that our 14 month rally based upon government handouts and accounting fraud is over. Heck, we’ll just call it foreplay…

Foreplay/Long Time - Boston