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II Insight 


2 March 2010

Global leaders in Technical Analysis since 1947

   

Welcome to the March edition of II Insight.

 

Well, February turned out to be the best February for the S&P 500 in twelve years! Hopefully readers benefitted with our bullish call at the start of the month.

 

Fingers are also crossed that March will see volatility settle down. The VIX, our chart of the month, has been jumpy over recent months and markets have gone nowhere. However, trading has been constructive.

 

During February many global indexes established support at their key moving averages, creating a potentially fantastic bullish technical setup for March. We highlight the Chinese index as one such example of this. We also show Crude Oil as it too looks set to resume its march higher following a five month pause. And finally, we show our NYSE bullish % indicator as it sits poised to confirm an internal recovery.

 

Happy trading

 

Tarquin Coe, Senior Technical Analyst

www.investorsintelligence.com

Chart of the Month Ė the VIX
 
The OEX Volatility Index (VIX) has swung wildly since mid-December, reflecting an emotional and chaotic market place; the S&P has gone nowhere over the period. One day it appeared to want to go up, only for it then to go down and vice versa. It has been easy for traders to get caught on the wrong side and at times coin flipping appears to be just as effective at guessing its next direction. Times like that are emotionally draining and that just exacerbates the decision making process.
 
However, the Coe Report has remained unscathed during this period. The Coe Reportís portfolio has 30 open and closed trades on its book since mid-December. Just 3 of those trades were losers and even then their average loss was limited to just -1.52%! Thatís a 90% hit rate during an extremely choppy period.  
 
The Coe Report is available at just $35 a month. If you have never subscribed to the service before then by all means email our subscriptions manager, Sarah, to organize a free trial. Sarah can be reached at sbarnes@stockcube.com.
    
Indexes - China
 
The Shanghai Composite Index (SHCOMP) is clinging to its 200-day EMA with dear life and with good reason.
 
Failure of the moving average to provide support could see a certain visit down to 2600. A move to there could in turn activate a double-top formation, a pattern that portends an even deeper slide down to 1800, a level not visited since the November 2008 low.
 
 
 
Providing the 200-day EMA can provide support over the short-term and a reassertion can commence, then that violent slide scenario is unlikely. With technical analysis it is vital to think two steps ahead and always be aware of, and prepared for, all potential outcomes. For the time being we rate this chart a buy until technicals prove otherwise.  Risk can be limited to just the moving average.
 
Each trading day we highlight investment opportunities, both up and down, in the International Equity Index Hotline. 
 
We also regularly trade emerging market ETFs such as the iShares China 25 Index (FXI) in the ETF Review (we bought FXI on February 26th).  
    
    

Commodities Ė Crude Oil

 

Last month we highlighted and stressed the importance of the 500-day EMA on the S&P 500 chart. That same average on the Crude Oil (CL1) chart has also served as a useful guide to long-term direction. Oil has made two attempts to breakdown through this average, in mid-December and then early February. With both attempts, the average repelled oil back to the upside.

 

 

With support being provided by the 500-day EMA, the primary direction remains up but to where? Retracement levels of the July 2008 to December 2008 low provide the strongest upside targets. The commodity has already retraced a Fibonacci 38.2% of the decline at $76.28 and the chart has consolidated across this level since October. The next rung on the ladder is the 50% retracement level at $89.83. That level lines up with a region of resistance from the late 2007 consolidation. So the cluster around $90 is our target for the next month, providing there is no violation of the February-5 low ($69.50).

 

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 NYSE Bullish %
 
Investors Intelligence pioneered the use of bullish percentage charts as an indicator of market breadth in 1957. The broadest measure of the US market is the NYSE Bullish %, essentially the percentage of stocks in the index with P&F bull trends.
 
A significant buy signal for the indicator is just around the corner.  A touch of 66% would trigger a three box reversal. That would provide confirmation that the recovery from the early February low was not just a correction but a reassertion of the general uptrend. It would signal that the internal health of the market was strengthening and confirm the price recovery by the indexes off the early February lows. Basically, the troops would be returning to the frontline!
 
Point and Figure charts have been central to analysis at Investors Intelligence since the 1950ís. Veterans Mike Burke and John Gray have amassed 77 years experience between them of P&F chart reading. When this chart turns up and provides that buy confirmation, it will be discussed immediately in the US Hotlines.
 
    
    
Has the European equity market seen the highs for the year?
 
Since taking over the publication of the Investors Intelligence European Equity service last summer, technical analyst, and our own in-house European, Michele Affortunati has made some important timing calls on the markets.

Here is Michele's comment from late January (corresponding to the area circled on the chart):
 
"Stock indices in Europe declined sharply over the last week.  The combination of increasing uncertainties in the banking sector and the tightening of the monetary policy in China are the main causes for these corrections.

The DJ Euro Stoxx 50 broke the 100-day MA and tests today sideways support at the December lows at 2800. The 14-day RSI is oversold, but made new lows, highlighting the depth of the correction and signaling the probable end of the uptrend commenced in March last year"


We also noted the rolling over of All-Europe breadth indicator (see red line on the lower window of chart), commenting;

"Our All-Europe % P&F breadth indicator has unwound overbought and declined sharply below the top of its range. Once again, our indicator has proved an excellent tool to anticipate market deteriorations."
 
So far, this has proved to be correct, but what next? We retain our broady bearish stance at the index level, but will continue to monitor technical  developments as, and when, they occur. In Michelle's report this month highlights some positive developments at the stock, sector and single-country index level including the Swiss SMI, the Personal & Household Goods sector and individual stocks Heineken, Henkel and France Telecom.
 
This month we are offering an opportunity for our II Insight readers to try out our European stocks service, with no obligation. Simply click here to register for your FREE TRIAL subscription.  If you would like a reminder of your Investors Intelligence login details, please click here.            
    
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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.
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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