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II Insight 


3 June 2009, Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

    
Welcome to the June edition of II Insight.
 
A new month and a new global news story to rock the Markets. In April it was the H1N1 outbreak in Mexico but in May it was arms testing in North Korea.  This geopolitical event provides a great example of the importance of chart readers to not be subjective. Trading behind news is a sure way to burn money. As our own stock market veteran, Mike Burke once said “News on stocks is not important. How the stock reacts to it is important.”
 
This month we illustrate the impact of those events on the Korean KOSPI. We also liken recent sentiment readings to one year ago and consider the charts for the greenback and the CRB commodities index. The report ends with an example on the use of pair charts as part of an investment strategy.
 
Tarquin Coe, Senior Analyst
    

Chart of the month - Could history repeat with the early summer highs marking the top of just another bear market rally?

 

The percentage of bearish advisors in our Advisor Sentiment Survey reached an interesting level at the  end of May. The reading of 30% equaled the reading of one year ago, the same time the equity markets were putting in the finishing touches to the first sizeable bear market rally.

 

Following that occasion, the indexes reasserted down, with the number of bears steadily rising to around 55% at the October lows, a bullish reading that pointed to an imminent bottom.

 

So during June, the readings and the markets action will prove enlightening.  

 

Sentiment Readings are published weekly in the Advisors Sentiment Report, analyzed every Wednesday before the open.             

Commodities 

 

The CRB-Index (CRY) is a broad commodity index based on 19 weighted commodities; weightings depend on their importance to global trade. Commodities are priced in Dollars, so they benefit when the USD falls, as it did during May.

 

The index has run into lateral resistance from the consolidation of late October and early November 2008. Additionally the 200-day exponential moving average now threatens the rally.

 

Breadth is now over stretched. Breadth, as measured by the % of commodities in P&F bull trends, is trading around 90%. A level not seen for over a year.

 

The index has its work cut out if it is to make further gains from here and we would not be surprised if the index is lower come next month’s report.

 

NYMEX Crude Oil (CL1) has the heaviest weighting in the CRB-Index. We covered the chart in the April edition, when Oil was trading at $48.83. In that report we called for a rally to $66 and this level was hit on the final Trading day of May. Profits should be taken.

 

We analyze all the major commodities daily in the Daily Commodity Hotline.                

Global Indices

 

The South Korean index, the KOSPI, initially sold off following arms testing by its communist neighbor, North Korea.

 

However, the index sharply recovered intraday and subsequent threats of attack by North Korea have been brushed off by the index.

 

These geopolitical events failed to harm the chart, with the KOSPI maintaining trading above the 200-day exponential moving average and relative performance against the US remaining as it did prior to the news.

 

The chart is a great example of not trading the news. One of the most important tenets of technical analysis is to be objective and not subjective.

 

Each trading day we highlight investment opportunities, both up and down, in the International Equity Index Hotline. 

 

We also provide region specific coverage in the UK Daily Hotline and US Daily Hotline.

  
    
    

Currencies

 

The US Dollar Index (DXY) has pulled back to a historic level around 80 and its now a case of sink or swim.

This level provided support for decades, only to be broken in September 2007. The shelf then turned to resistance for twelve months until it turned to support once again following the upside break in October 2008. A test at the start January was successful but the level is once again undergoing an important test. Previous trading in and around this level is typically volatile, so a perfect tag and run is not expected.

Conditions are oversold, so a bounce from here looks likely over the next few weeks. Though trading will be volatile.

 

We brought this chart to the attention of our ETF Review subscribers in the final week of May, warning of commodity, currency and international ETF underperformance as they are all priced in the USD. The ETF Review is available on a monthly basis for $15 a month.

 

We also analyze currencies in the FX Hotline.

Strategy – Utilizing Sector Rotations

 

A great feature of the Investors Intelligence website is the ability to analysis ratio or spread charts. These charts are simply one stock price divided by the other and then plotted as a regular line chart. They are great for analyzing sector rotations.

 

Rotations between sectors are often a leading indicator, with clever money shifting from one sector to another, ahead of the broader indexes giving a buy or sell signal.

 

During May, Utilities found support against the Consumer Discretionary sector. At the same time, breadth for the Utilities sector, measured by the percentage of the constituents trading above their 30-week moving average, developed a bullish divergence. This action pointed to a defensive rotation during May, suggesting caution. 

 

Similar evidence of this rotation was confirmed by the ratio of Utilities against other cyclical sectors. In May, Utilities were oversold and finding support against the Financials, Industrials, Information Technology and even the Consumer Staples.

 

Subscribers to the US Stocks Service can experiment and investigate ratios of their choice by using the tools on the Investors Intelligence website.  With over 6000 US stocks on our database, the number of possible ratio charts is infinite.

    
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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
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