Friday, July 23, 2010

Morning Update/ Market Thread 7/23

Good Morning,

Equity futures are moving back and forth across the even line this morning with the dollar up, bonds flat, oil down, and gold slightly higher.

Regarding oil, it is currently at $79 a barrel and did almost make it to the $80 mark again yesterday. Last night I read an article showing a very high correlation between oil at or above $80 and the pressure that it created on equity markets and the economy. Going back to mid ’07, if we look at the times that oil exceeded that $80 mark we will see that indeed the markets and economy have struggled greatly. The year spent over $80 from October of ’07 to October ’08 correlates almost exactly with wave A down that bottomed five months after oil fell back below $80. Again at the end of last year and early this year oil began to push $80, and the markets and economy have stalled again. I’m not saying that it’s instant or that the cause and effect are directly related to that mark, but there is a strong correlation and we are pushing that point again so it’s worth acknowledging and watching this demarcation line.

There is no economic news today, however, Standard & Poor’s is threatening to downgrade Hungary’s debt to junk (duh, but notice how they will only downgrade the less powerful nations even though many of the more powerful nations are as bad or worse debt wise), and today is the European “Stress Test” results, Ooooo, I can’t wait. This is the one and only mention you will hear from me regarding these stress tests – it can easily be summarized in one word, JOKE. They are not fooling anyone but themselves… well maybe a CNBC “analyst” or two along with every Nobel Prize winning economist, but other than them no one else is that gullible.

Significant earnings movers overnight were AMZN which is down dramatically after recognizing that profits are pressured by price cuts for the Kindle along with higher expenses and opposing that weakness is Ford who posted strong gains, Microsoft, Verizon, and McDonalds.

Yesterday’s 200 point romp indeed turned out to be yet another 90%+ day, this time coming in at a “weak” 90.5%. It pushed prices right into resistance at the SPX 1090 level. That was the 9th 90% up day since the April peak, the score is now 11 down and 9 up for a total of twenty – nuts.

We did not exceed the high of July 13th, but we did come close. That action is very close to eliminating a smaller wave 2 of 3 and probably indicates that a larger degree wave 2 is in progress. If that’s the case, then July 1 was the bottom of wave 1 and the July 13th high was five waves into a wave ‘a’ top. That means that we may be working our way higher in wave ‘c’ which would need a sideways to down movement followed by another push higher to more fully draw in the bulls. A daily chart of the SPX shows that we are now progressing outside of the wave 1 down channel. Keep in mind that H&S target of 860, it is a large pattern and obviously just needs time to play out:

There is a rather large bearish divergence on the short term RSI that developed yesterday and is still in place. That contrasts with a significant bullish divergence on the daily RSI which this wave higher should work off. So I would expect some sideways action followed, of course, by a 90% chance of a Monday HFT ramp job.

Guns & Roses – Patience: