8 November 2011
Welcome to the November edition of II Insight. In last month's report equity indexes were attempting to breakout of ranges. During the second half of October they managed to do just that, pushing up through resistance from their sideways ranges. However, there has been no important follow-through and that is a concern. Similar behavior was seen in 2008 and we take a look at that period to see if history could repeat. We also review the emerging market trade which typically provides leadership. It's not all dreary news as one area continues to shine, Gold!
Technical Analyst, New York office.
With ongoing turmoil in Europe the start of November has seen a resurgence by the yellow metal as investors seek safety and security. The SPDR Gold Trust (GLD) fund is reasserting its primary uptrend.
This week the P&F chart has rallied through falling trendline resistance drawn down from the September highs. Breaking above the prior column of "X"'s has reaffirmed the existing buy signal. That rally should extend back up to the September high ($185.85) as conditions are not overbought as evident from the 14-day RSI.
2008 all over again?
2011 trading on the S&P 550 is leaving a similar footprint to that of 2007 and early 2008. In the Coe Report
on October 28th
when the index was trading at 1280 we highlighted the developing potential and those charts are reprinted below.
“In May 2008 there was a potentially similar correction from oversold and it is that action, in a similar climate, which is preventing us from adopting a bullish stance just yet. The index then corrected as far as the 200-day SMA as well as the neckline of a head-and-shoulders top. Very similar to the current snap-back.“
Subsequent action has seen a deterioration from the 200-day moving average. If this weakness continues and the index slips back beneath 1200 then we may see a repeat of 2008, with new lows for 2011 ahead. However, recapturing the broken 200-day MA would negate the likelihood of history repeating and a move back up to the 2011 highs would be expected.
Emerging markets remain weak
The iShares Emerging Markets (EEM) ETF has been underperforming the U.S. market since October last year. In September of this year a monster head-and-shoulders relative top was activated and that has yet to fulfill its bearish potential (down to the 0.028 region on the chart).
The emerging markets led on the way up and they lead on the way down. When they bottom it is likely to be ahead of the developed world, as it was in October 2008. As yet they have not established a concrete floor (the recent early October relative low was not a firm place to hang one's hat).
Recent trading has seen the emerging market's relative chart correct from oversold but with the 50-day exponential moving average now tested, the trend is reasserting its slide. That is another reason for not filling your boots at current levels. Rather, gradual accumulation on weakness is suggested.
This chart appeared and was analyzed in the Coe Report on November 4th.
Dont forget to keep watching the Advisors Sentiment!
Every week, the Investors Intelligence US team review a wide range of independent advisory newsletters, gauging the sentiment of investors across the country. The result of this is the Advisors Sentiment indicator and we believe it is the best tool on the Street for identifying major turning points.
Take a look at this chart from early-October. At the time, the S&P500 had jsut touched and bounced from the 1100 level. The indicator was down in deeply oversold territory - equivalent to the readings we saw back in September 2010. The report stated:
"The spread indicator is now in buying territory, with the largest negative difference since Mar-09. Now watch for a notable chart upturn to confirm a low risk for new general accumulation."
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