Wednesday, June 9, 2010

Morning Update/ Market Thread 6/9

Good Morning,

Equity futures are higher this morning after bouncing off 1,040 support once again yesterday. The dollar is down, Euro is up, bonds are down, oil is up, and gold is down. In other words, just the opposite of the relationship of the recent decline.

While the SPX 1,040 support area is the neckline of that large H&S pattern that’s trying to trace itself out, the resistance for the dollar is also strong. There is also support there in equities from the 200 month moving average. So, how high do we bounce? There are resistance levels all over the place, with the first one at 1,070, then 1,080, 1,100, and the 200 dma is at 1,110. Below is a 60 minute chart of the SPX:

If you look at the waves on the surface, it appears that we just finished wave 5 down – but that’s not what is happening because of the EW rules. First of all, what appears to be wave 3 is shorter than wave 1. However, the rule states, "Out of the three impulse waves - 1, 3 and 5 - wave 3 can never be the shortest." So, while wave 3 is shorter than 1, if we just finished wave 5 then it was the shortest. But it's another rule that eliminates that count, "Wave 4 may never end in the price territory of wave 1." So, we are working on the premise that wave 3 is still underway and that this bounce is a correction within wave 3.

This may be just a short bounce, and that is what I’m suspecting. McHugh believes this final bounce is a part of wave 2 of 3 and that 3 of 3 will follow, that means a large and very sharp decline will follow. I put the maximum range for this bounce just above 1,140 which is where the 50 dma will meet prices if we continue higher for any length of time. There are alternate counts that would produce a shallow bounce here and I am favoring those.

The number of new lows rose to 131 yesterday, that was a divergence against rising prices. There were 22 new highs – if both numbers go above 75 then we will look at the other indicators to see if we get a Hindenburg or not. The NDX also failed to make it into positive territory with the DOW up 115 points! That’s something new, and again is an unhealthy split in the market.

Could the IMF be speaking the truth when they say the following? I think so, and again that’s something new!
IMF Says Risks to Economy Have Risen ‘Significantly’

June 9 (Bloomberg) -- Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

Most advanced economies are experiencing a “subdued” recovery, Shinohara said in a speech in Singapore today. “A key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”
That’s it in a nutshell. The world is debt saturated and the will/ability to crank out even more debt is waning sharply. Welcome to wave C, the wave that actually produces change or allows enough debt to be cleared that another economic cycle can occur.

The shameful/worthless MBA Purchase Applications Index came in as a disaster this morning. While they only report percentage moves, we do know that Purchase Application fell to new record lows over the past few weeks following the end of homebuyer tax credits. Today the MBA reported that Purchase Applications fell another 5.7%, and that Refinancings fell 14.3% moving the entire Index down 12.2% - for the WEEK. Here’s Econoday:
Purchase applications continue to fall following April's end to second-round stimulus, down 5.7 percent in the June 4 week for a 35 percent decline from just four weeks ago. Refinance applications, after shooting higher in recent weeks on low mortgage rates, eased back in the latest week by 14.3 percent. The report warns that many homeowners who have yet to refinance may not be able to so if they remain underwater on their mortgages, have uncertain job situations, or have damaged credit. Mortgage rates were little changed in the week with 30-year loans averaging 4.81 percent.

I think we’re going to see some very weak sales reports over the coming months, and I think the high end housing industry is in big trouble with the giant wave of Option-ARM resets now in progress and growing stronger.

For those who didn’t catch my post in the market thread yesterday, Calculated Risk ran a piece with his analysis of the effect of Census workers on upcoming employment reports. He calculates that they will be laying off about 200,000 temporary workers that were just hired this month! So, if the net hiring is not positive and swings that large to the negative side, you can look for a negative employment report ahead. Also, if you look historically at the Birth/Death model adjustments, they peak in May and then decrease, so it should not be as large in the next report – if they can contain themselves that is.

So, expect some “we’re saved” talk over the next few days (hours), then for reality to set in again. In fact I just read a report about a supposed 5% jump of lending in China – we’re saved! LOL, that’s pretty much what the article said, amazing.

Oh, and for the gold bugs in all of us, gold did reach a new intraday high yesterday before pulling back. That triggered a new bullish target on the P&F chart of $1,310.

The CBOE Put/Call ratio did reach a level that can correspond to short term bottoms yesterday, closing at 1.16. Below is a chart showing the daily moves against the SPX in the background:

If you’re playing the bounce I hope you’re nimble. I’ll be hitching a ride on 3 of 3…

Boston – Hitch A Ride: