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II Insight 


1 Dec 2009, Edited by Tarquin Coe

Global leaders in Technical Analysis since 1947

                

Welcome to the December edition of II Insight.

 

In this monthís Insight we start by covering the recent rotation from small caps to big caps and consider whether this is just a friendly game of pass the parcel or the start of the post party hangover.

 

We also pin-point some downside targets for the sliding Greenback and some upside targets for its yellow & shiny adversary.  We then finish on how one of our proprietary indicators called the November 2nd low to a tee.

 

Finally, get your stockings lined up for Santaís rally, historically he delivers over the final five trading days of December and the first two of January.

 

Happy holidays

 

Tarquin Coe, Senior Analyst

www.investorsintelligence.com

    
Chart of the Month Ė Will the Small Caps recover?
 
The small caps have been bullied down since mid-September. Off the March lows they led the market but now they are underperforming. This is a concern for the general market, as narrowing participation is not a healthy bull market.  The large caps have consequently outperformed over  three
 
cent weeks. It remains to be seen whether this is a major defensive rotation ahead of a sizeable correction or just a case of the defensives taking the baton as other areas (the small caps), cool off. We prefer the second scenario but when will they turn?
 
Seasonality forecasts small caps typically start to outperform from mid-December and then excel over the first three months of the New Year. So is that phenomenon likely to repeat this year?
 
The ratio chart of the Russell 2000 (RTY) versus the Dow Jones Industrials (INDU) shows that the small caps are down to a potential support level. The momentum chart, 14-day RSI, shows bullish divergence developing. So technically, the chart is poised for a bounce and the seasonality effect could spark up that recovery.
 
In the US Hotlines we analyze all the major indexes on a daily basis, from the small cap Russell 2000 to the big caps of the Dow 30.  We specialize in P&F trends for the indices as well as the internal health through breadth studies.
 
Individual small cap trading ideas are highlighted in the Coe Report.
    
Currencies Ė the USD
 
 The US Dollar Index (DXY) downtrend persists. In the first week of November the index flirted with its 50-day exponential moving average (EMA) but failed to hold a breakout. Only a sustained break above this average would snap the eight month downtrend.
 
 
The MACD indicator is a long way from oversold and we expect a visit down to the 2008 base between 71 and 74 into the end of the year.
 
The PowerShares US Dollar Index Bearish (UDN) ETF is an instrument to play the move. The Coe Report bought this fund on the 28th of October.
 
Our bearish Dollar view extends to other anti-Dollar trades from the ETF realm. Those trades include buying commodity, currency and international ETFs, all of which are of course priced in Dollars. The international ETFs are particularly interesting, as not only are they rising as the Dollar falls (as the underlying price is based on their domestic currencies) but they are also gaining as the indexes themselves are in bull markets. Of course there is sizeable downside risk should the USD recover. However, as long as the Greenback continues to fall, we are with the crowd until chart technicals prove otherwise.   
 
Currencies are also analyzed daily in the FX Hotline.
    
Commodities - Gold
 
We last looked at London Spot Gold (GOLDS) two months ago. At the time Gold was hovering around $1000 and it was unclear as to which direction the yellow metal would move.
 
We suggested that only a break above $1032.7 (the March 2008 high) anytime soon would turn the chart bullish. On the 6th of October, Gold surged to end the session at $1042.1. That was the breakout and Gold has not looked back since and now stands closer to $1200.
 
 
 
Sentiment is turning extremely bullish and as contrarians, that is a negative. That said, as central banks continue to buy up the metal (Russia is the latest to do so), contrarians should step to the side for the time being.
 
So the big question is how far can gold go?
 
One of the simplest methods for deriving targets in technical analysis is the ďmeasured moveĒ.  This technique is particularly useful when an instrument is breaking out to new all time highs and there are no resistance levels to work with.
 
Quite simply, the measured move involves determining the depth of a range and adding it to the point of the breakout. In the case of Gold, the depth of the two year range was $300, adding that to the breakout point across $1000, provides a target to the $1300 level. 
 
So the best advice for those who want in is to buy on pull-backs but take profits around the $1300 level. On reaching $1300 sentiment is likely to have reached such stratospheric levels that the correction when it happens will be spectacular, so stops should be strict.
 
Commodities are covered daily in the Daily Commodity Hotline, with analysis from Cornelia Dichio in the UK. Commodity ETFs from the US market are covered each week in the ETF Review by Tarquin Coe.
   
    
    
Investors Intelligence Proprietary Indicators Ė the short-term-composite
 
This month we will take a look at the Short-term-Composite Indicator, as its movement at the start of November provided an excellent example of its capability.
 
 
For those who are unfamiliar with the short-term-composite Indicator:
 
The short-term-composite is generated from scores awarded to 29 market indicators (un-weighted) and is only concerned with the most recent action. The Indicator oscillates between values of 0 and 100. Above 90 is super overbought and beneath 10 is super oversold.
 
On the 2nd of November the short-term-composite fell to a low of 10.3. That is the lowest reading since the 8.6 on the 9th of March this year. Needless to say, that reading of 10.3 on our indicator proved to be another great buying opportunity as the market reversed on the 2nd November; with the Dow Industrials since climbing around 10%. 
 
So what is the indicator telling us now? Well, although it is most effective at extremes, the current reading is mid-range, so yes, the Dow can go even higher yet. So despite the breakout to new highs by the Dow in November, the index is not overbought!
 

Point and Figure charts have been a staple of analysis at Investors Intelligence since the 1950ís. Veterans Mike Burke and John Gray have amassed 76 years experience between them of P&F chart reading. P&F analysis of the Short-term-composite and many other indicators are detailed daily in the US Hotlines.            

Looking forward to 2010, and the decade to come.............

And in next monthís copy of II insight - Ten great trades for the next decade. Now, in the words of the great Yogi Berra might well have said "Itís tough to make predictions, especially about the future. Anyway, we are going to try. All decades have one big theme, and that one trade is all you need - think Japan in the 1980ís, or tech stocks in the 1990ís, or mining stocks this decade. The II team in London and New York will put their heads together to come up with some themes that might just make the grade in the "teens".

In the meanwhile, Iíd like to wish a happy Christmas to all our subscribers. We look forward to serving you in 2010.      


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.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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