Friday, December 31, 2010

New Year 2011- Year of the Rabbit

Last Week the S&P 500 Index extended its gains this week closing at SPX 1256.77. This is a new rally closing high and new 2010 closing high. Volume continues to be low and this will be the case next week as well. The SPX is now only 1.5% below technical resistance at 1275.25. Just above is the very important resistance level at SPX 1305.32. This is the closing high from all the way back on August 11, 2008.

This week:

The S&P 500 Index - SPX finished the year with another weekly gain, though a fractional one, and new weekly closing high.

Next week will be the first week in January and watched by many as a forecaster of the coming year.
 I am not of that mind but I still watch with interest how the new year starts.

For many years the start of the new year was marked by strength in small caps. A first week rally often accurately predicted a good year ahead. However as a forecaster for the rest of the year, the first week of January has not been very accurate in recent years.

One concern as we start the new year is the current Elliott Wave count. Since the correction lows were reached back in late June, 2010, the SPX has risen in a very obvious five wave pattern. Typically when such a pattern exists, the fifth wave, which we are in now, ends with a substantial correction.

Wave analysis has its limitations as does any technical analysis that tries to forecast what will happen in the future. For example, we could have a very limited correction and then start an entirely new advance. Or we could keep advancing and in doing so create a different wave pattern.

I do not try to "guess" ahead of time what the market will do, though I do try to look ahead via wave analysis, Fibonacci support and resistance levels, and other technical analysis tools. I have never found a crystal ball that actually worked. But I am watching carefully for signs that the current wave 5 might end with a "tradable" correction.

The SPX remains above its 50-day moving average having successfully tested it twice at the correction lows. The SPX is well above its 200-day moving average. The 50-day moving average is above the 200-day average which is bullish.

The SPX still has room to move higher. The next resistance level is up at 1275.25, and it is a technical one. The next major resistance level is up at SPX 1305.32. This is the market high from back on August 11, 2008. Profit taking is sure to take a toll on stock prices assuming we reach this level in coming weeks.

A close above the 2008 highs would be hugely bullish and point to a resumption of the entire 2009 rally and considerably higher highs. The potential for an entirely new bullish five wave pattern would be quite real.

The SPX 1217.28 level should act as strong support. When it was reached back in November it resulted in a reversal and month long correction.

Monday, December 20, 2010

Market Outlook

Sunday, December 26

Santa never fails to deliver :

Short Trade developed as planned

First Target reached and filled for + 8.5 Pts

Wednesday, December 22nd, 2010

SOLD 1254.50 ESH11 - March '11 E-Mini S&P500 Futures- New Swing Position

Setup, Targets and Stop Loss  as described to subscribers

Total Lunar Eclipse tonight on Winter Solstice -- last time this happened was 465 years ago (1545), coinciding with crop failure in China

Some market observers suggest the market is running of steam even in the face of a virtual barrage of good news. Even the now finalized tax cut bill brought little further upside momentum. The market has now likely priced in an extension of the Bush-( the alcoholic )-Era tax cuts, positive retail sales, higher consumer confidence, and positive factory production data, and of course the Fed’s second round of quantitative easing 'QE2' (with the Fed performing Permanent Open Market Operations (POMOs) virtually every day, sometimes several such transactions in a single session).

Note that this will be an abbreviated trading week. The US stock market will be closed on Friday in observance of Christmas.

 Friday’s Options Expiration was uneventful and, overnight, after being down on a weak Asian showing, the ES rallied strongly to new highs in the European session. With critical support holding last week, the ES is in good shape to resume the rally as emailed to subscribers on Sunday.  The Institutional Key Numbers worked as expected last Friday and today.

 We do have one new warning, however, after review of the Fed’s weekly data release.  92% of the Fed’s $48.5 billion in Treasury purchases over the two week bank reserve period of December 2-15 was put on deposit right back with the Fed to earn interest at 0.25%.  This represents a defensive posture for the banks going into year end, and if this continues (we won’t know until the December 30 release), any correction in equities could quickly become material without the Fed’s money printing floor. 

The Federal Reserve Bank pulled off two separate POMO(permanent open market operations) operations today for a total purchase of $13 - $18 billion worth of U.S. Treasuries. This action by the central bank has helped to inflate the stock markets higher since it was announced by the Federal Reserve Bank Chairman Ben Bernanke on August 27th, 2010. It is rather obvious that the central bank wants to keep the mood very jolly into the Christmas holiday which is on December 25th, 2010. The Fed also has a double POMO operation scheduled for tomorrow. This has been the first time that the Fed has orchestrated back to back double POMO injection days since QE-2 began.

In order for the Federal Reserve Bank's quantitative easing program to work for a while it will require the U.S. consumer to spend money. At this time U.S. consumer spending accounts for 70.0 percent of the gross domestic product(GDP) in the United States. Without the American consumer spending money this inflation rally will be a complete failure. Deflation happens for a reason and it is a real warning that something is fundamentally flawed with the current system. However, instead of letting supply and demand dictate where and how the markets will trade the central banks artificially inflate the markets with low interest rates and the purchasing of Treasury bonds. This causes inflation and a wealth effect. The logic behind this method is once people feel better because they see their 401K's and retirement plans going up they will begin to spend more money and income. The Keynesian system that has been in place for so long can continue to function as it has for so many years.

The one problem with this theory is that every other central bank that has tried this method has been ultimately unsuccessful. Japan has been battling deflation since the late 1980's. In 1989, the Nikkei Index traded near the 40,000 level. Today the Japanese stock market index trades around the 10,000 level. This is nearly two decades of sideways to lower action in the second largest economy. What has saved the Japanese people has been the high savings rate and the low debt load by the Japanese citizens. This is just the opposite of the U.S. consumer who is still loaded with debt and has a very low savings rate. Enjoy the inflation rally while it lasts. Unfortunately nothing lasts forever.

My strategy remains the same as explained to subscribers.
Will resume the Intraday Price Action Reviews with Setups  as soon as more comments are added to the Blog.

Monday, December 13, 2010

Weekly View Assessment of The Trend

Back from some fine Skiing in the mountains.Long position from 1088 is now flat.Thank you to all Subscribers for your emails.

Looking at the markets:

From a technical perspective, we are in as real a bull market as it gets. The S&P 500 made a textbook bounce off of the 50 DMA support and 1,175 support level. We should get a nice run up into the end of the year.

There are some technical concerns. The percentage of NYSE stocks above their 50 DMA is at 69.64% which is below it's 50 DMA and well below percentage seen in the last bullish run. From September 9 until the recent pullback we saw numbers above 70% and usually aboe 80%. On 11/5 it was at 88%. The number of new 52 week highs is only 195 (it was 541 on 11/4). Despite the rally, the number of new lows is expanding and is at levels common during the August bottom. The rally is getting narrower as it goes higher. The Retail Sector ETF is displaying poor performance in the entire sector. This is the time of year for retailers to shine but they can't. If the retailers can't rally and the Financial Sector stops it's rally, then I think that the rally will likely end.
From a strategic and fundamental perspective there are various concerns. There are not enough concerns to outweigh the technical picture but enough to keep me from backing up the truck and contiune the long Bias. You have probably heard the endless bearish arguments on TV and the Internet so I won't re-hash it all in detail here.
One recent and popular argument is that the retail investor may be returning to the market and they will bring hundreds of billions of dollars with them. This could be the case but it is a slow process that is not important to us as traders. Last month retail investors removed only 500 million from mutual funds, the lowest in years.
Prior months saw removals of 15 billion and up from these funds. If removal of 15+ billion every month for a couple of years couldn't stop the biggest rally in history then I would count them out as a major factor, and at +/- 1 billion their impact is insignificant.

What I want to see in a rally is an expansion of the stocks making new highs, more stocks over their 50 DMA, and growing interest in stocks that will do better in the future but are not doing so well now.

On Tuesday we get the November retail sales report and consensus is at a gain of .7%. If we get a good number then the rally should be safe. Industrial Production is on Wednesday but expectations are low and it could be considered old news so that shouldn't be a problem.

If any correction is going to take palce it will probably be before FED Day.

Monday morning trading began on a positive note as investors learned that China had refrained on the weekend from raising its benchmark interest rate to stem inflation. This inaction in regards to Chinese monetary policy sparked a rise on many Asian markets, and the US equity market followed suit early on.

No economic reports were scheduled for release today. Tomorrow, however, should see a flurry of activity: The US Senate is expected to vote on the (extension of the Bush the alcoholic) tax cuts; the US government will release PPI, core PPI, retail sales, retail sales ex-auto, and business inventories data; the Federal Reserve will make its latest decision on interest rates.

The US dollar was weak all day today. The passage of the tax cuts would accelerate US deficits even more and could lead to the US credit rating (currently AAA) being placed on negative outlook in the future.But of course the Republicans never discloused to the public this critical risk, because all they care is to satisfy their rich contituents.  While euro zone debt problems could boost the dollar against the euro, the US deficit issues could put pressure on the greenback.

With the holidays approaching, overall volume output is dwindling. Less than one billion shares were traded on the NYSE today.