The market appears to be sending us an observable signal of a possible top. This week for the first time since the Lehman failure, we are hearing from people we know that they are quitting their jobs to trade. Although, it appears that we are near or approaching an interim top we are waiting for one more signal, the cabby signal. What is the cabby signal? When your cab driver, if you can afford a cab at the current prices, give you stock advice…..buy puts on anything you can get your hands on. Bitcoin was an early warning. We tried to short it by purchasing stuff with the Bitcoin currency. Problem was nobody would take it. Too bad would have made a killing on that one.
What is pushing our US market higher? Money flowing to the US shores from abroad. The USA appears to be safer and less apt to be subject to an extraordinary tax or bank collapse. The US banks seem or give the appearance of being a safe place to park money and our markets are the beneficiaries of that inflow of cash which finds its way into investments.
Clearly the cheap imports from China have kept the cost of most imported items that are purchased in check. This is a real number but it truly masks the forces of living inflation. So what is living inflation? It can be defined at the cost of daily living when considering the cost of food, shelter, transportation, utilities and things basically that are home-grown and produced here in the USA. Just think about your grocery bills. Notice the boxes haven’t changed size but the amount of content within the box has changed dramatically giving you less product for a slightly increased cost. That translates to inflation on the food front. Utility bills, while not crazy at the moment have been part of the cost out the door. Driving has several component prices; one of which is the cost of gasoline, another part is the cost of insurance, cost of repairs, and let us not forget about the ever rising tolls we all have to pay. How about your real-estate taxes, have they been reduced or do they continue to soar? We just received ours with a whopping increase. What we are saying to you is; that there is inflation and it is alive and well. It can be found in much of the stuff that our government does not count when tracking inflation yet, we need these to survive. Why isn’t the economy expanding, simple, because the average household is just getting by and cannot afford to buy much more than the necessities of life.
The Fed is keeping interest rates artificially low. Why? Well think about it for more than a half of a second. With artificially low interest rates we also have artificially low repayment rates for the money that the US is borrowing to survive. Sounds like a “no-brainer” keep costs low by printing more money and controlling interest rate where ever and whenever possible.
Most seasoned traders knew that the S&P 500 was going to take out the 2007 high, simply because it was there. Every trader worth his salt knows that if the market is approaching and close to a high or a low, it will be removed. Why, to find out where the stops are and who will scramble to jump on the trend. That is one of the oldest games in town. The S&P 500 broke out of its trading range, rectangle, and will likely clear 1600 before retreating in earnest. Our first projection was 1596-7 and we were wrong the market only went to 1593. We notice that the market retreated in the Friday session basically going flat in front of a weekend when no trading could be done. The concern is not only North Korea but other risks that could appear and deter the market’s advance. It is much safer to be out and flat than to be long or short and wrong.
The four-day advance in the S&P 500 was cut off in the Friday session. The ominous looking candlestick really did not to any harm to the uptrend and merely allowed some players to take some profits. The Wednesday and Thursday sessions closed above the upper Bollinger Band and were at risk for this sort of profit taking. Going into the Friday session the market was overbought as measured by the indicators that we follow herein. We have signs of exhaustion in this market. The Friday action saw the low touch the 5-day exponential moving average and bounce back above it closing near the upper edge of the Bollinger Band. The market has rallied way above the uptrend line and it is likely that it will test the breakout point of the rectangle at about 1566. The stochastic indicator, our own indicator and the RSI are all pointing lower, for the moment telling us that it is likely that 1566 will be seen. We are above the Ichimoku Clouds for all time-frames. The 5-day exponential moving average is at 1576.09. The top of the Bollinger Band is at 1583.76 and the lower edge is seen at 1531.66. The indicators on the weekly chart are overbought but not curling over to the downside. They have been overbought since the end of December 2012. Even the monthly indicators are overbought. All of this leads us to express caution. The 1% by 3 box daily point and figure chart is very bullish. The 0.05% by 3 box 60 minute chart does have a downtrend line and an upside target that was met. The Stop and Reverse SAR is long. Remember that the SAR is always in the market either long or short and it never is neutral. Go with the trend, which is up, but remain scared and ready to abandon your positions. Use stops and remain cautious.
The NASDAQ 100 saw the Bollinger Bands explode this week. Remember we were talking about the narrowing of the Bollinger Band and explained that a violent move would likely follow well, it did. The Wednesday and Thursday sessions closed above the upper Bollinger Band. On Friday we saw the market retreat back inside the Bollinger Bands. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 2831.37. The upper Bollinger Band is at 2848.81 and the lower edge is seen at 2749.31. It is likely that this market will return to the breakout zone of 2812- 2823. The stochastic indicator and the RSI have issued warnings that we are overbought and turning lower. Our own indicator looks as though it might issue the same signal but has not done so as of this writing. The Thomas DeMark Expert indicator continues to point higher at overbought levels. The Market Profile chart tells us that the Friday session was weak from its opening. The perceived fair value of the index in the Thursday session where 8.8% of the volume was seen was 2850.75, that value in the Friday session was not met volume wise and the heavy volume was seen at 2844.75 where 7.4% of the day’s volume was seen. It would have been more bullish to see a continuation of the volume at the higher price in the Friday session. The 1% by 3 box daily point and figure chart continues to look bullish. The SAR on the 0.05% by 3 box 60 minute chart is still long the NASDAQ. We do have a downtrend line on the chart. Caution is warranted on this index.
The worst looking chart of the financial charts is, of course, the Russell 2000. This market never rallied above the Bollinger Band. This index makes a high on March 15, 2013. That high was not met or challenged this past week. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is 937.36. The top of the Bollinger Band is at 958.47 and the lower edge is seen at 917.79. The stochastic indicator has issued a sell-signal and the RSI is pointing lower. Our own indicator is curling over to the downside but we cannot tell when or if those lines will cross. The Thomas DeMark Expert indicator continues to point higher at overbought levels. The up trending channel lines are 929.65 and 950.15. The downtrend line is at 949.70. 13.7% of the volume in the Thursday session was at 945.00 and 13.2% of the volume in the Friday session was at 939.50. Until or unless 949.50 is removed, this rally is in trouble. The 1% by 3 box daily chart remains bullish with no downtrend lines. The 60 minute 0.05% by 3 box chart is far less bullish.
Crude oil plummeted in the Friday session falling 2.37% on the day. Although the product managed to close above the day’s low but it did close below the lower Bollinger Band. The 5-day exponential moving average is 92.86. The top of the Bollinger Band is 97.69 and the lower edge is seen at 90.76. We are below the Ichimoku Clouds for both the daily and the weekly time-frames. We are above the clouds for the monthly time-frame. The market has to stay above 89.33 or risk a trip to 85.21, 84.05 and 77.28. All the indicators that we follow herein are pointing lower with still room to the downside. There isn’t a bend or a twist to the upside from any of the indicators. The 1% by 3 box daily point and figure chart has a downside target of 75.82. The 0.07% by 3 box 60 minute chart has an active downside target of 83.36. We are on a SAR sell.
Gold declined 78.7 points in the Friday session which was one of the largest declines seen in a very long time. The 5-day exponential moving average is 1539.92. The top of the Bollinger Band is seen at 1642.09 and the lower edge is seen at 1524.08. We close much lower than the lower Bollinger Band. It seems as though the shine if off the metal and the boat is tipped to the short side. That said, we are looking for an entry for a quick bounce to the upside after which, we would jump out of the trade. The next target to the downside is 1420. Should that level fall, we would see support at 1362 and then 1307 or so. Where would the bounce take us, likely to about 1515 and 1530. After that, it is quite possible that we will decline to 1471 or so before reversing course to the upside. There are times when we will play the contra side of the market. That is a dangerous game but if you are willing to watch it carefully can be a profitable very short-term trade. Gold is the contra-trade for this week. We are looking for a safe place to go long for a very short bounce to the upside.
The US Dollar index declined in the Friday session almost tagging the lower channel line in what appears to be a very organized retreat. The down trending channel lines are 82.759 and 82.095. The 5-period exponential moving average is 82.449. The top of the Bollinger Band is 83.462 and the lower edge is seen at 82.135. The low print for the Friday session matched the low print in the Thursday session which increases the importance of that number. The US Dollar index must stay above that number or risk a downward thrust to 81.83. The stochastic indicator is about ready to issue a buy-signal but has not done so. The RSI is pointing to the upside and our won indicator and the Thomas DeMark Expert indicator have issued a buy-signal. We are above the Ichimoku Clouds for all time-frames. There are two strange outliers on the chart, on to the upside at 83.66 and one to the downside at 81.83, are they real? We really are not sure but they do show up on two different data sources. They could represent algorithms gone wild, we are not sure. The Market Profile chart tells us that below 82.125 there is little in the way of support.
The 1% by 3 box daily point and figure chart remains positive. The 60 minute 0.05% by 3 box chart is less positive and confirms targets seen on the Market Profile chart.
Jeanette Schwarz Young, CFP®, CMT, M.S.
Jordan Young, CMT
83 Highwood Terrace
Weehawken, New Jersey 07086
April 14, 2013