Tuesday, August 31, 2010

Morning Update/ Market Thread 8/31

Good Morning,

Equity futures are down again overnight after yesterday’s mini waterfall. The dollar is lower against both the Euro and the Yen, bonds are higher, and oil is down while gold rockets higher. It is quite apparent that gold is likely to take out its previous high and is very significant that it continues higher in the face of deleveraging elsewhere.

There are several economic reports that come out this morning after the open, we have Case-Schiller numbers on home prices, the Chicago PMI, and Consumer Confidence. We will announce those reports in today’s daily thread as they are released.

The folks over at dshort.com put together a terrific chart showing the ECRI against the SPX and also put in GDP in the background (green bars). The ECRI has been the only indicator that I know of that does tend to actually lead the economy and the markets. The Fed’s LEI is just flat out outdated. Note on the chart that the ECRI is now at minus 5.57, almost as deep into contraction as it was in ’08. The divergence between the ECRI and the SPX is now huge - the SPX H&S pattern is clear as a bell:

If last Friday’s action wasn’t bizarre enough, coupling a Hindenburg Omen and rising new 52 week lows with a 92% volume up day… Yesterday we saw a 92% down day reversal with contracting new lows and no Hindenburg Omen! Very bizarre, and once again a reminder of how this market lacks uniformity, something that is a requirement for overall higher prices.

Yesterday’s 90%+ down day is now the 14th since the April top to go along with 12 90%+ up days.

The market fell right back into the 1040 to 1050 support range yesterday, but has fallen to the bottom of that range overnight. Yesterday’s decline came on relatively low volume which I think is a result of a traditional vacation week just prior to Labor Day. I would look for volumes to pick back up next week. Below is a daily chart of the SPX, yesterday’s close was below Friday’s open, that is bearish:

On the 60 minute chart, you can see that prices are channeling nicely downwards from the August 9th high. The bottom of that channel is now in the 1015 to 1020 range where it’s likely this current move will find support once 1040 breaks. SPX 1010 is still the H&S target of the smaller pattern:

The channel above works for all the indices except the Russell 2000. That adds to the count confusion for me, especially as McHugh changed his primary count last night to reflect the bounce that finished Friday as being a subwave 4 of 1 of 3 versus a subwave 2 of 3. He cites proportionality of the last bounce, time wise, with the first bounce of this move… you can see that clearly inside of the channel above. And the fact that it does channel nicely supports that count. Again, the RUT breaking out of the channel still supports the wave 2 count that I was using as waves are always confined to channels, when they break the channel you are likely in a new wave, or the channel you thought you were in is simply larger than you had it, and that may be the case for the RUT.

Under the new working count, yesterday’s action would be the first wave down of subwave 5 of 1 of 3. That means that we should find a small wave 2 bounce, and then some type of completion to a wave 5 bottom soon. That intermediate bottom may come upon reaching the 1010 or 1020ish area? McHugh has a Fibonacci turn date on the 2nd, and then another on the 11th of September, it could be that we bottom in a couple of days and bounce in wave 2 of 3 until about the second turn date, plus or minus – that’s his thinking. Nailing the WHEN is the hardest part of technical analysis, so take it with many grains of salt. Direction is the easiest part, then depth or range, and then timing. I’ve been telling you direction (down), and depth (1010 and then 860), but timing is difficult indeed, as is keeping the count.

Meanwhile, the VIX just keeps rolling along, nothing too severe - yet:

What I like about McHugh is that he adjusts quickly and does not stay married to old counts while offering alternatives. Many amateurs do not like that, they want something rock solid without realizing that is impossible in a dynamic market.