August index trading was at the mercy of Crude Oil and woes in the Financial sector. Worries over the US mortgage insurers, and the fear of further write-downs in the Financial sector, maintains downside pressure on the markets. A bail out of Fannie and Freddie by the Treasury department would go a long way to stabilizing the Financial markets and provide a much needed catalyst to spark a rally out of the trading ranges of the last nine months. Ahead of the open, on each trading day, we provide subscribers with informative analysis of market action and likely direction in our Daily Hotlines, with separate reports for the US and the UK. The US Hotline is written by John Gray and Mike Burke, who between them have over 80 years experience of chart analysis. TheUK Hotline is edited by Dr Jackson Wong, one of the people in the world to have a Doctorate in Technical Analysis.
The picture for the major global indices varies from region to region. Some Asian indices have already tested or violated their July lows. European indices are firmer but a test the July lows for US markets is possibility. Historically September is one of the weakest months of the year but it could well be different in 2008, given that it is an election year.
However, a break of the July lows might be no bad thing in the long run, providing a much needed shake out and clearing the dead wood, making way for a broad sustained end of year rally. If those lows are violated we would watch for evidence of selling climaxes across our stock universe, as we did successfully in early July when there were 959 selling climaxes, the second largest in our history, surpassed only by 1,385 selling climaxes shown with the January 2008 bottom.
We analyse buy and sell climaxes in a weekly report every Monday as part our US Market Timing package, a group of products edited by John Gray and Mike Burke.
Our Advisors Sentiment Survey, running for over forty years, continues to indicate that we are developing a long-term bottom in the markets. The weekly survey is one the best contrarian indicators in the market and is often quoted in the press and on financial media channels like CNBC and Bloomberg Television. The survey is compiled by stock market veteran Mike Burke and the survey is invaluable for both private and institutional investors who wish to catch the next wave.
Recent survey readings have shown the same level of bearishness as the 1994/5 bottom, a similar period of weekly ups and downs, all part of constructive base building. In February 1995 the Dow climbed above 4000 and then took off for the next six years before topping out in 2000.
Note; the Advisors Sentiment Service is also include in our USMT and Combo packages.
Crude is attempting stabilized just above the 200-day exponential moving average, and has spent August trading in a $10 range between $112 and $122.
With prices lower again today ($109), the question is whether this is a bottom for the downtrend from the July high or whether it is a mere consolidation of that downtrend, with more falls to follow.
The chart shows clear price support from the 200-day EMA. Oil has not traded below this average since March 2007, with only short-lived breaks below the average prior to that, such as in late 2006. You have to step way back to 2001 to see more prolonged trading below the average, and only then it was limited to a twelve month period. So the overall long-term trend for Oil is up and moves towards the average, such as we are witnessing now, should be viewed as corrections of that trend.
Near-term however, we expect volatility, and a snappy break below the 200-day, such as we are experiencing at present is not too surprising. Whilst further shorter-term downside can not be ruled out, investors in Energy should not let short-term noise and weakness distract them from the long-term picture.
If your interest is commodities, we provide a Daily Commodity Hotline, which analyses the key US and European contracts. Analysis is by Cornelia Dichio, who started her career with David Fuller of www.fullermoney.com, she now has amassed over 20 years of experience as a Technical Analyst.
Do you trade fixed income? If so, why not try our daily Fixed Income Hotline? We provide a daily email update, online charts and indicators and a long/short model portfolio. Here’s Jackson Wong’s latest thoughts on the US bond market....
"Over the past few weeks, US bond yields have declined a fair distance from their July peaks. The 10-year bond yield, for instance, eased 30bps from 4.1% while the 5-year bond yield lost 50bps from 3.5%.
As the inflationary threat recedes – sparked by a sharp decline in energy prices – bond yields are likely to come under pressure.
In other words, the near-term price risk for US bonds is tilted towards the bull side. The 2-year T-Note future, shown on the right, maintains the recent bullish breakout at 105.85. Thus a long stance here, and in the 5-year T-Notes, remains technically favourable.
However it is perhaps too early to determine if their March peaks would be taken out on the upside. Therefore, traders are advised to insert tight stop losses to guard against potential corrections. "
Strength in America’s Greenback has heavily impacted the currency, commodity and ETF charts during August. The Dollar Index (DXY) has now rallied over 5% in less than a month, and each time it looks set to correct lower, it reasserts to make a new short-term high.
Should the Dollar index carry to new recovery highs over the next two weeks as we expect, the short-term daily chart will exhibit bearish momentum divergence on the 14-day RSI. That action would indicate an overbought rally, and with price resistance at 78 and then 80, the index will be too exhausted to climb much higher.
The importance and substance of resistance at 80 only becomes apparent when studying the longer term, quarterly bar chart. Here, going back thirty years, the 80 level stands out as a colossal horizontal level, in fact the biggest level since the 1980s.
This shelf provided robust support in January 1991, August 1992, April 1995 and December 2004. It had to give way eventually and after an eighteen year period of drop hammering, the ground at 80 was finally broken in August of last year.
When support gives way, it turns into resistance, and that shelf at 80 is now expected to prove as equally stubborn and impenetrable to upside rallies, as it was to those on the downside.
When big levels get broken, there is often a retest to confirm the break, and the current rally conforms to that behavior. We remain long-term bearish the dollar providing the index remains beneath 80 (blips above 80 may occur but they must be short-lived).
Currencies are covered daily in our Currency Hotline, which covers key technical movements and developments across global currencies. Analysis is by the experienced Cornelia Dichio
The last month there has been some violent moves amongst the overseas markets ETFs, making exciting trading with fast gains to those on the right side of these moves. We provide a weekly ETF report every Thursday that aims to highlight the hot areas. Subscribers to the ETF service also have access to an extensive library of ETF charts that are updated daily with the most important and relevant indicators.
Going forward, we like the iShares China 25 Index Fund (FXI) as it finds support at 40 with a bullish hammer candle pattern on the weekly chart. Finding support at this shelf has also been backed by bullish momentum divergence on the MACD chart, a phenomenon that has been developing since the lows earlier in 2008. With the Olympics now a memory, China is getting back to work and we like the developing action. Investors who go long should consider placing stops just below the recent hammer pattern at 39.
Note, this trade would be negated by a break below this key support. The next few weeks should deliver this important outcome.
Indicators and Signals
In the US Daily Hotline we review thirty indicators and signals that cover the main US indices. Many of these indicators are unique to Investors Intelligence, having been originally designed by us and then developed and optimised over the years.
Index breadth measures the breadth of trends within a particular index and are best known for their use as "contrary indicators" and valuable tools for market timing. They work on the principle that once virtually all members of a particular stock index are participating in the same market movement then there is a strong probability that this market movement will come to an end in the near future.
The NYSE Bullish %, was developed by Investors Intelligence in 1955, and measures the percentage of point & figure bull trends amongst NYSE constituents. We have since applied the technique to a range of indices and sectors, and provide coverage of these in our daily US service. This is just one example from a range of tools used by us and all these charts are available to our subscribers online, along with a variety of parameters that can be adapted by users to a particular trading system.
Here we have plotted the NASDAQ 100 bullish % and note the rejection at downtrend resistance. This signals that breadth is deteriorating and explains the reluctance by the NASDAQ to maintain leadership amongst the big board indexes into the second half of August.
The US Industry Bell Curve is covered every Tuesday as part of our US Market Timing service and is written by Mike Burke and John Gray.
The diagram is based on Industry breadth and shows that the industry groups have very much recovered from their July lows and are now close to neutral. The most oversold industry is the Precious Metals with the Oil Industry being the least.
At the July lows a whopping 33 out of 46 industry groups were oversold. That observation, coupled to what we were noting in the Advisors Sentiment provided us with enough evidence that we were at the bottom and the market agreed. It is for this reason that we have grouped together our most useful products in to the US Market Timing service. When a number of techniques all point to the same destination; it provides us with the confidence to call the market, and that’s something we have achieved at key junctures.