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II Insight 


June 2010

Global leaders in Technical Analysis since 1947

 
    
Welcome to the June edition of II Insight.
 
 
Last month we anticipated a correction but even we were surprised by the speed with which it arrived. Twenty-four hours after the publication of the May report the market experienced its flash crash and has since broken beneath that low, resulting in a correction of 14.6% from the April-26 high to May-25 low. In last month's report the charts suggested caution, whereas now they paint a very different picture.
 
Below we review the S&P 500 and its breadth, selling climaxes on the NYSE and the Euro.
 
Tarquin Coe, Market Technician
Indexes – the S&P 500 and breadth
 
The S&P 500 is finding support at its February low and more important for the long term direction, its 500-day exponential moving average. That average has contained bull and bear markets for decades and for the current sell-off to develop a base to the underside of it is very encouraging.
 
The index has also retraced a Fibonacci 23.6% of the rally off the March 2009 low, a level we have been highlighting for some time in the Coe Report as a likely cushion to the correction that started on April-26.
 
Breadth for the index, measured by the percentage of stocks in the S&P 500 with confirmed P&F uptrends, recently achieved its lowest level since March 2009. That deterioration would have shaken out many of the weaker hands and in doing so, created a more robust market. Another flash crash is extremely unlikely.
 

 
Breadth on the major US indexes is reported daily in the US Hotlines.
    
    
    
    
Investors Intelligence Proprietary Indicators – Selling Climaxes
 
Last month we analyzed the buying climaxes. Well, given the sharpness and magnitude of the market correction since then, the survey is now at the other end of the spectrum and we are now counting a high level of selling climaxes. A Weekly Selling Climax occurs when a share makes a new 52-week low but then closes higher for the week.
 
For the final week of May we counted the highest level of selling climaxes since the March 2009 bottom. That reading suggests capitulation following four weeks of falls and implies that the recent lows should mark the crescendo of the market rout that started a month ago.

 

 

 

Every Monday we publish the buying and selling climax data, including a list of every stock making a climax. This data and accompanying report is part of the US Market Timing Service.

 

    
Currencies – US Dollar versus Euro
 
Last week the Euro, against the greenback, fell to its lowest level since March 2006. That period, four years ago, consisted of constructive basing that dragged on for months with the floor of the bottom printing at $1.164 (to the Euro).  That level is now critical to the present and it needs to provide support should the current slide extend.
 
 

 

The short Euro short trade remains overcrowded and conditions are oversold, so the cited level should hold. However, the chart is vulnerable to “event risk” and if $1.164 were to break then the next biggest level of support is a lot lower down at 85 cents (to buy one Euro!). Additionally dropping through $1.164 would put the final nail in the coffin of a double top formation that is maturing, a pattern that has a target down to 86 cents, the same region.
 
From a trading perspective, it's a case of sitting on the fence for the time being. If the chart starts to trade sideways as per 2005/6, then small long positions may be accumulated as a bottom could be under construction. However, exit longs if that key level starts to give way.
 
 
Mainstream currency ETFs, such as the CurrencyShares Euro Trust (FXE), are covered in the ETF Review by Tarquin Coe.  We also analyze global currencies on a daily basis in the FX Hotline.
    
    
 
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