The market enjoyed a wonderful run to the 14000 level and did, in fact, close at that level, in the Thursday session. While the Friday downdraft that followed that Dow-Jones record-closing high, felt as though the bottom had fallen out of the hot-air-balloon ride, it, in fact, only jiggled a bit, scaring the occupants of said balloon. This leaves us curious to see whether the buyers will step back into the market, within a day or so. To date, that has been the history, the basis for the 2007 mantra, “BUY THE DIPS.”
We noted last week that the put-sellers were out there in force, but we have to report to you that there was some buying back of those outstanding naked puts, during downside slide, in the Friday session. We also noted that those same put sellers were quietly selling some September puts, while buying back some of their August exposure. Friday was the first day on which we actually saw some risk-adverse behavior, appear. What do they know that we don’t? Hummm?
The US Dollar index continued slipping further into the abyss. It should be noted that the velocity of that decline has abated somewhat, seeming to be stabilizing a tad. Now, that leaves us with three possibilities: 1st, we are just resting before another onslaught of lower lows, 2nd, we are forming a bottom and 3rd, we are getting ready to rally. Before checking off your favorite eventuality, remember we are deep in summer-vacation season, which accelerates in August. Although the market looks as though the downside is not finished, we are approaching a point at which we will have the final wash-out.
The minimum wage has now been increased to $5.85/hr. Unfortunately, the minimum wage has not kept pace with the inflation rate, which is the good news. The bad news is, that should it ever catch up with the inflation rate, we will enter an inflation spiral that can not be easily contained. Here is another thought: as the US Dollar becomes weaker, the global workers, used in outsourcing cost-containment, will demand more money, for the jobs they are performing. This will return some jobs to our shores; well, theoretically, it will, if you can find workers to work, for minimum wage. Ah, another problem that will find itself flowing into the increasing costs of finished goods: Not only will manufactured goods feel this cost increase, but much of the out-sourced tech support, will cost more. Bottom line is: We will pay more for everything. Speaking of increased costs, the Continuous Commodity index posted a fresh, life-of-contract high, this past week. Not a word of this mentioned, by any of the financial networks. Hello: anybody home at the news desk? Naturally, this factoid was mentioned by MN1 last week on our broadcast!
As to the US Car makers, the weak US Dollar brings down the cost of an American-made car, when compared to a European import. Unfortunately, this is theory, only because many of the foreign cars are made here in the USA. Thus, as our car makers, burdened with healthcare costs and perks, afforded the unions, are bogged down with employee costs per car, the imports do not have that albatross hanging around their profit, per car, picture. It is unfortunate, but the old ways of paying for employee’s benefits, will be negotiated away in the current set of union talks, with the automotive workers union. There is no way that these union bosses won’t realize that they are negotiating for the very existence of the two remaining “all American”, car companies.
US Stocks are undervalued when converted to Euros, but this begs the question: “is the Euro overvalued.” This would then bring to question: is the US undervalued, really? With earnings beginning to slow and forecasts of future growth, a little subdued, it is possible that the US is not undervalued, but fully valued, at these levels. We have mass speculation in the new, hot sectors, which are embedded in the M&A (mergers and acquisitions) end, of the market. Add to that the over-speculation in the hedge fund arena, and we have too much cash chasing too few winners. This never ends well, and does continue for longer than most believe it will, but it does end. Therefore, we are willing to say that, although the market could press higher in the near-term, this slow appreciation is like a car, stuck in ice or mud, taking a lot of effort to move, only inches forward. We are driving up the muddy incline of a hill which, should we lose our footing, will cast us lower. In other words, we are going to have a correction and that correction, will be deep enough to scare the “buy the dips” crowd, into a more realistic view of this market.
The US Dollar index closed the Friday session, well off the lows of the session, managing to remove some of the early morning losses. We now have a 9-count on the bottom, so what does this tell you? Well, it tells you that we are grossly oversold and that, we will have a bounce, within a day or so. True, we didn’t need a count to tell us that we are oversold, we know that, but what this count tells us is that we will stabilize and perhaps, rally a bit from this level. Unfortunately, the indicators are seeing eye-to-eye, with this and tell us that there is more pain for the US Dollar index bulls. The stochastic indicator is issuing an iffy buy-signal. The other indicators continue to issue a sell-signal. The only other indicator that is grossly oversold is the RSI, which is bending lower, but not convincingly lower. Interestingly, the range expanded in the Friday session, with a higher-high and a lower-low, closing below the Thursday high. The 5-period exponential moving average is at 80.288. The top of the Bollinger band is at 82.389 and the lower edge is seen at 79.88. There are two useful downtrend lines for the Monday session. The very short- term, downtrend line is at 80.421 and the longer, better, downtrend line is at 80.76. To get a move to the upside we need, at the very least, to close above the short-term line, at 80.421. A close above 80.76, will change the direction of this market, well, at least, remove some of the downside pressures. The weekly chart is grossly oversold. The stochastic indicator is issuing a buy-signal. Our own indicator is about to issue, a like signal. The Thomas DeMark Expert indicator and the RSI are both oversold and going sideways. The monthly chart has a 9-count. The monthly chart is extremely oversold and the indicators are uniformly, pointing to lower levels. The bottom line is that we will have a bounce in the US Dollar index. The quality of this bounce is extremely important to us and will show us if we are at a short-term bottom or, will continue, lower.
As much as the US Dollar index is oversold, the Euro is overbought. The Friday session yielded a fresh high for the year, when the Euro printed 1.38690. We have a 9-count on the top, at grossly overbought levels. All the indicators that we follow herein, are overbought and all, uniformly, continue to issue a solid, buy-signal. The 5-period exponential moving average is at 1.38240. The top of the Bollinger band is at 1.39464 and the lower edge is seen at 1.34122. The weekly chart has signs of exhaustion. We are making little progress to the upside, with a lot of effort to move the Euro. The indicators on the weekly chart are overbought and seem to be directionless, at these overbought levels. We are at the upper edge of the Bollinger band on the weekly chart, which, although we can stay here for a while, poses resistance to any upward efforts. Naturally, the monthly chart is overbought and the indicators are pointing higher. The bottom line is that, although the markets are expecting to see 1.40, in short order, we feel that we might fall short of that goal, on a short-term basis. The market is heavy and, at the very least, in need of a rest and sideways consolidation.
This week’s action in the S&P 500, resulted in giving the chart a rounding-top look. The week’s activity was accentuated by the testimony of Chairman Bernanke, the release of very sensitive economic data, earnings and, of course, the expiration of monthly options. All of this served to push the market around. By Friday, the market retreated, allegedly because of Google and CAT earnings. Perhaps, the market was tired of climbing the mountain, and took its foot off the gas, and rolled down the slope, returning to a rest stop, which was the previous upper edge of its earlier range. This retreat was to be expected; the question that we should consider is: will the “buy the dips” crowd abandon that behavior or, after a day or so, come in and support a further rally? The chart does tell us that we have lots of room to the downside. All the indicators that we follow herein, are issuing a continued sell-signal. We have come over overbought levels and, are approaching the overbought side of neutral. The 5-period exponential moving average is at 1552.25. The top of the Bollinger band is at 1568.39 and the lower edge is seen at 1498.91. The uptrend line for the Monday session is at 1535.80. The downtrend line for the Monday session is at 1561.68. The uptrend line on the weekly chart is at 1535.72. Three of the four indicators that we report on, are issuing a fresh, sell-signal on the weekly chart. Only the Thomas DeMark Expert indicator continues to issue a buy-signal, at overbought levels. The weekly chart looks tired and heavy; at the very least, in need of some consolidation, if not a pull-back. It would come as no surprise to see this market retreat. The monthly chart is overbought, the weekly chart overbought and, the daily chart, on the overbought side of neutral. Although the monthly chart continues to make progress to the upside, it is exhausted and in need of a rest. The weekly chart looks to be rolling over to the downside and, the daily chart is already on that path.
The NASDAQ 100 made a fresh yearly high in the Thursday session. Friday’s give-back did no damage to the bullish view of the chart. The uptrend line is at 2039.35, for the Monday session. All the indicators that we follow herein, are issuing a solid, sell-signal, at overbought levels. The 5-period exponential moving average is at 2054.03. The top of the Bollinger band is at 2089.96. We see a candle that could be seen as a hangman, on the daily chart. We have a sell-set-up point, at 2040.50. The weekly chart is showing us much the same information that was seen in the daily chart. We are overbought, as measured by the indicators that we follow. Only the RSI continues to point higher, at overbought levels. The other indicators that we follow herein, are uniformly, issuing a sell-signal. We have a scary 24 count on the weekly chart and an exhaustion signal. When we look at the monthly chart, we see that we have returned to levels, last seen in May, of 2001. The stochastic indicator and the Thomas DeMark Expert indicator, on the monthly chart, are issuing a sell-signal. Both the RSI and our own indicator, continue to issue a buy-signal, at extremely overbought levels. We are at a good place to stop and consolidate. We would not be surprised to see consolidation, and-or, a retreat from these levels. As an aside, when we reviewed the cash chart of the NASDAQ 100, we saw an evening star formation. This is a very bearish and rare signal. We only see it on the cash chart not on the futures chart.
The Russell 2000 has a very interesting chart. While the NASDAQ and the S&P 500 were busily making inroads to higher levels, and getting themselves severely overbought, in the process, the Russell 2000 was not overbought, as it entered this past week of trading. We did not make, or approach new highs, this past week. We have broken our uptrend line. All the indicators that we follow are uniformly, issuing a sell-signal from neutral levels. Only the Thomas DeMark Expert indicator is oversold. The 5-period exponential moving average is at 849.98. The top of the Bollinger band is at 865.81 and the lower edge is seen at, 832.67. We would not be surprised to see this market, test 824.20. The weekly chart of the Russell 2000 has a flat-top, illustrating the difficulty seen in any upside probes. The stochastic indicator, our own indicator and the RSI are all, uniformly issuing, a solid sell-signal, from overbought levels. The Thomas DeMark Expert indicator is going sideways, at overbought levels. The monthly chart has a doji candle. The indicators are uniformly, issuing a sell-signal. It would appear that money is rotating, out of the small capitalization indices, into larger capitalization indices, as illustrated by the action of the Russell 2000.
The Continuous Commodity Index printed a life-of-contract high, in the Friday session, but was unable to close at those levels. We saw a retreat, after the high was printed, as though this index fainted with altitude sickness. The stochastic indicator, our own indicator and the RSI, are uniformly issuing, a sell-signal, from overbought levels. The Thomas DeMark Expert indicator is issuing a buy-signal. The 5-period exponential moving average is at 422.22. The top of the Bollinger band is at 428.01 and the lower edge is seen at, 402.56. The uptrend line for the Monday session, is 418.10. We are far above that level. We do have signs of exhaustion, at these lofty levels. The negative that can be seen in the Friday session, is that as the new high was printed, sellers appeared and took the market down, enabling the bears to close the market, near the lows of the session. This is never a good sign. Profits were removed as we entered the weekend. The weekly chart has a doji candle, which, as you know, indicates that we could be in transition and changing direction. The indicators are uniformly issuing a sell-signal, on the weekly chart and we have an exhaustion signal. The monthly chart is extremely overbought, but the indicators continue to issue a buy-signal.
September cocoa filled the open gap on the chart and continued its upside movement, for most of last week’s trading, giving back some of the gains in the Friday session. All the indicators that we follow are uniformly issuing, a sell-signal, basis the daily chart. Cocoa stayed above the uptrend line and must stay above 20.98 in the Monday session. We did see some downside probes, violating that line, with a resolution closing the market, above the line. We would expect to see these minor violations occur, as sell-stops are elected. So long as the market remains above that uptrend line, on a closing basis, we will remain positive, in the short-term, but we are ready to turn negative. The weekly chart is rolling over to the downside. The indicators are mixed. Our own indicator is going flat, at somewhat overbought levels. The Thomas DeMark expert indicator is overbought and going sideways. The stochastic indicator is overbought and issuing a buy-signal. The RSI is sitting near overbought levels, going sideways. As you can see, the readings are mixed. We would not be surprised to see a further retreat in September cocoa.
September coffee did have a “W” formation, which seems to have a short-term completion, with the rally to 115.45, seen in the Thursday session. We have a 9-count on the top of this chart. The stochastic indicator, our own indicator and the RSI, are all issuing a sell-signal. The Thomas DeMark Expert indicator continues to issue a buy-signal, at overbought levels. The 5-period exponential moving average is at 113.13. The top of the Bollinger band is at 114.97 and the lower edge is seen at 108.90. We do have more room to the upside, but with the failure on Friday, we believe that the market can return to the 112.70 breakout level and perhaps, to 111.85, before another run to the upside. Take a look at the weekly chart. This chart shows a larger “W” formation; the rules haven’t changed a lot, we need to stay above 108.70 and need to close above 121.15, for a run to 137 or so! The weekly indicators are, uniformly, issuing a buy-signal. While the first “W” on the daily chart, projected to 116, as a completion of that formation, the weekly “W” would be more important if, and only if, coffee could trade above 121.15. That level seems to be miles away from where we closed on Friday, at 113.45.
October sugar rallied to the congestion area, at 10.53 and in doing so, removed the overhead gap on the chart. The market probed the upside, but failed to close at the highs and actually closed, below where it had opened. The candle, left on the chart, is a long legged, doji-like, candle. All the indicators that we follow herein, are issuing a sell-signal. The 5-period exponential moving average is at 10.11. The top of the Bollinger band is at 10.23 and the lower edge is seen at 9.19. We are far above the Bollinger band; it is unlikely that we will be able to stay at these levels, for very long. Expect to see this market retreat. When you look at the weekly chart, you will be impressed with the saucer-like bottom that sugar made. Yes, we are overbought, but the indicators continue to point to higher levels. We expect to see this market back-and-fill and perhaps, trade a bit lower in the short term. We are not looking for a major sell-off, but rather, a reasonable retreat to remove some of the overbought condition, seen in this market.
December cotton retreated for four of the five days this past week. Still, the retracement level shows a very minor retracement, probing just below the 38% retracement level in the Friday session. It would not be strange to see this market pull back to the 60.24 area, which would be a 50% retracement of the entire move. The indicators are uniformly pointing lower and are approaching oversold levels. The 5-period exponential moving average is at 64.92. The top of the Bollinger band is at 69.16 and the lower edge is seen at 59.69. The weekly chart points to exhaustion, as the market printed a new annual high and failed, removing two week’s of rally in one week. All the indicators that we follow herein, are uniformly issuing a sell-signal, at overbought levels. This chart is also pointing to a return to the 60.00 area. December cotton closed below the uptrend line and looks as though it may open lower in the Monday session, and then, try to rally above that line, which is at 63.87 for the Monday session.
September Frozen Concentrated Orange Juice left a doji candle on the chart, as a result of the Friday trading session. The market moved back to the congestion area, which extends to 143.40, on the upside. The stochastic indicator and our own indicator, are both curling over, to the downside, but neither has issued a sell-signal. The Thomas DeMark Expert indicator continues to issue a buy-signal. The RSI is going sideways, near overbought levels. The 5-period exponential moving average, is at 133.00. The top of the Bollinger band is at 136.65 and the lower edge is seen at, 122.08. The weekly chart looks as though Frozen Concentrated Orange Juice will continue a bit higher. All the indicators are uniformly, issuing a buy-signal. The market must close above 140.70, on a short-term basis, to break the short-term downtrend line. On the other hand, the market must stay above 127.22, to maintain the uptrend line on the daily chart.
September Crude oil closed the Friday session in an area on the Market Profile chart which is comfortable and shows lots of volume at that level. It looks as though that level is perceived as a fair-value level, for crude oil. Should we get above 76.32, we will move into the fast move area, of the Market Profile chart, which could take us back to 78.40, which is the life-of-contract high, for the September contract, and higher. The stochastic indicator and the RSI are both overbought and issuing, a sell-signal. The 5-period moving average is at 75.10. The top of the Bollinger band is at 76.74 and the lower edge is seen at 68.04. It seems likely that we are ready to back-and-fill, a bit, before another rally attempt is seen. The weekly chart shows the inverted, head-and-shoulders pattern, very clearly. We would expect to see new highs, as this pattern is completed. The stochastic indicator is overbought and is issuing a fresh sell-signal. The RSI is overbought and pointing higher. The monthly chart shows a rounded bottom and a continuation of the upside movement in crude oil.
August gold shows an inverted, head-and-shoulders pattern. We saw this market push to the upside, in the Friday session. The stochastic indicator is overbought and issuing, a fresh, sell-signal. The RSI is overbought and continues to issue, a buy-signal. The problem is that we seem to have gone too far, too fast and need to back-and-fill, a bit. The market closed above the upper Bollinger band and is stretched too far, to the upside. The 5-period moving average is at 673.70. The top of the Bollinger band is at 681.40 and the lower edge is seen at 640.01. The weekly chart places gold in a path to challenge the recent highs. The stochastic indicator and the RSI are both issuing, continued buy-signals. We believe that the highs of April will be removed, but that this market needs to rest, before it takes a run to the upside.
Jeanette Schwarz Young, CFP, CMT
Box 1952 c/o New York Board of Trade
One North End Avenue
New York, New York 10282