Market Snap Shot

By Frank Barbera CMT. August 18, 2009

Having been out of town on vacation last week, we return to Los Angeles to find the markets at a most interesting juncture. As it happens, we see a number of potentially major turning points shaping up in the days just ahead. In today’s somewhat abbreviated update, we walk investors thru our take on some of the key capital markets. Of course, one of the most hotly contested and debated markets is always the trend for the US Stock Market. In recent sessions, a number of analysts have alluded to a substantial change in sentiment in the stock market which showed itself during the course of last week. A rise in the percentage of bulls argued for a potential correction. In some cases, analysts suggested that a downside correction in the S&P 500 could see prices erode toward the 910 to 940 area. In my view, that is probably going to turn out to be a bit too negative, as a number of short term gauges were actually already moving down to oversold values at Monday’s close and in the early going today. On the S&P daily chart, we find that the 9 day RSI has moved from a reading of +83.16 on August 4th (with the S&P at 1005.65) to a reading on Monday, August 17th of +44.24 (with the S&P at a close of 979.73).

That means that a little more than a 2.5% correction from the high was enough to move the RSI gauge down largely across the entire range. As an additional thought, we would note that in strong bull markets it is not uncommon for the RSI traditional +70 to +30 scale to ‘shift up’ and become a +80 to +40 scale. This is known as the 80/40 Rule and quite often in a strong uptrend, prices will bottom when the 9 day RSI reaches a value in the low +40 range. That happened on Monday. By the way, as an aside, in Bear Markets the range ‘shifts down’ and we often see the 60/20 Rule, which we highlight on the same chart and which worked very effectively for most of the crisis in 2008. As a result, we tend to lean toward the idea that near term downside risk in the stock market will likely be quite limited, with support in the zone between 960 and 980. In the near term, any move by the S&P back above 993 would imply a full retest of the high at 1012-1018. While it is possible that the S&P could consolidate in range bound price action for another week or two, overall we believe the next material move from here will be to the upside. On a medium term basis, with upside momentum still very strong, it is likely that the S&P will continue to move higher into the late September – October time frame, with prices potentially pressing toward 1100.

Above: Goldman Sachs (GS)

Another idea that we are keeping a close eye on at the present time is the price action in some of the market bell-weathers. In this case, our focus is particularly intense on the price action of some of the large cap financials, names like Goldman Sachs (GS) and JP Morgan (JPM). In my view, as long as some of these large cap financials are still acting reasonably well on the charts, the stock market will likely remain in an uptrend. In the case of Goldman Sachs (GS), the $155 area is important chart support, with the rising 50 day average at present near $153.14. In my view Goldman remains in a bullish mode as long as the stock price is above $153-$155 while for JP Morgan, the $40 area is solid near term support. Again, we are singling these two names as indicators to watch for signs of any potential, unexpected trend change developments. If the stock market is running out of gas and should begin to top, I believe weakness would soon develop in some of these large cap financial bell-weathers, and that would be a warning that things are starting to deteriorate. In 2007 and 2008, before the major problems fully surfaced, the financials began to act poorly, and with issues surrounding the Commercial Real Estate market likely to heat up in the months ahead, we must once again maintain a close watch on the trend in financials.

Above: JP Morgan Chase (JPM)

Another market that is near a potential inflection point at present could be the 10 Year Treasury Bond. In this case, the 3.30% yield level looks like major support, and that could be tested and/or closely approached over the next few days. On the momentum front, RSI is rapidly moving down the range and could record a reading below +30 if yields dip a bit further toward 3.30% -- they ended Tuesday at 3.52%. In my view, the remaining downside risk in Bond yields is now becoming a very small amount, and it is even possible that yields are bottoming at present levels near 3.52%. In the weeks ahead I believe Bond yields will resume their advance and could move back up across the recent range toward readings closer to 3.85%. For many of the Rising Rate Mutual Funds (Rydex, Profunds, Direxion, etc.) along with some of the rising Rate ETF’s, this is setting up as a potentially interesting time.

Dovetailing with a turn in long term interest rates, could be a break down in the US Dollar, which in my view appears to be quite imminent. Over the last few months, the 77.50 to 78.30 zone on the Dollar Index has been major support, and with short term sell signals being tripped off at the current time, the path for the Dollar is likely to be to the downside very soon. Once the Dollar Index closes below 77.50, I would expect a sharp decline toward the former lows seen in July of last year near 72.00. There is no question that a decline and breakdown in the Dollar Index would be bullish for a wide range of commodities including Gold, Silver, Oil and the Base Metals. In that vein, commodity related stocks are also of high interest, as any move up in the commodities will likely spark a sharp advance in commodity related equities. Among the many indices I watch in the commodity patch, the large cap Energy stocks are usually a pretty good trend gauge. Located using the symbol, XOI, the Amex Oil Index has been in a very wide trading range base for the last 8 months. Overall, the index has lagged the S&P as Crude Oil prices have been relatively depressed for some time. Yet, the recent action in the XOI hints that the downside selling pressure could be drying up, and that if the index can move back above resistance at 965 over the next few days, especially in concert with a Dollar Index close below 77.50, a bullish signal should flash. For the XOI, I noted one positive event today, namely the index moving just barely back above the 50 day average which ended on Tuesday at a reading of 933.65 with the index closing at 934.48.

That’s all for now,

Above: the Amex Oil Index

Frank Barbera

© 2009 Frank Barbera

Contact Information

Frank Barbera CMT
Editor, Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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