I have to admit to being somewhat surprised at the continuing slide of the USD. Just as the US equities continue to appear like they are nearing a top the USD continues to appear like it is making a bottom but the creeping trends continue.
With most EW analysts agreeing that we are approaching the final stages of a top in the US and Australian indices at some level it is worth looking at both the big picture and intraday picture to see if we can come to some conclusion about where this top may take place.
First of all we can see some key levels that were generated by the plunge that commenced in October 2007 and ended in March 2009. We can see that the 61.8% Fibonacci retrace level (1228.74) of the plunge was important for the March 2009 rally as it topped out on the 26th April 2010 at 1219.8.
This key level once again provided some overhead resistance to the index on the 5th November 2010 when the index peaked at 1227.08 and again on the 9th November 2010 when it peaked at 1226.84. Following those peaks the index dropped then consolidated and finally broke through that key level on the 7th December 2010.
It remains to be seen whether we have seen the top in the S&P500 when it peaked at 1296.06 on the 18th January 2011 but if not, it would be reasonable to suspect that the key levels between 1300 and 1313 will be targeted.
When looking at the 99 minute intraday chart of the S&P500 we can see some clear channels and trend lines that are (and have been) in play in recent times.
Note that the index has been moving in an upward trending channel shown by the red lines in the above chart. Due to the strength of the rally the index has been travelling in the upper half of the channel since early December.
On the 7th January, the index commenced a steep rally indicated by the heavy blue line on the above chart. We can see that this created a 5 wave move that terminated on the 18th January at 1296.06. The rally then broke down at this level and fell through the heavy blue trend line indicating that this short term move was completed.
The index then fell back to the thin blue line which so far has supported 3 bounces as denoted by the blue arrows on the chart.
We can see that the index had a minor rally to the downward trending thin blue trend line and closed below the lower boundary of the short term red ascending trend line. This may turn out to be a ‘kiss of death’ for the rally but we can’t come to that conclusion just yet. For the medium term trend to be over we need to see the price action fall through the medium term trend line at around the 1260 level. By the time the price action moves into this region that trend line would possibly be around the 1262~1263 level (same level as the low pointed at by the second blue arrow).
Looking at the weekly planetary chart for the S&P500 we can see that that the index poked through the Neptune line at 1293 and has since closed at 1283.35 at the end of the week. Note that the planetary charts always show a blue candle to designate the current week but in fact this candle would show up as a red candle on normal charts.
The lead from Wall street has our ASX200 futures contract suggesting a move up of around 10 points on Monday. On the NYSE the ADRs have BHP up 0.03%, RIO up 0.41% and WBC up 1.13%. We can see that the materials sector of late has been weakening whereas the financial sector has been remaining somewhat stable at current price levels.
For the XJO I have carried out a similar ‘big picture/small picture’ approach to that which I carried out for the S&P500 but on this occasion I have used the drop that took place between the 15th April and 21st May 2010 for the big picture and the daily chart for the small picture. From big picture chart below we get the following key Fibonacci levels:
61.8% Fibonacci level : 4700.63
78.6% Fibonacci level : 4843.33
Looking at the daily chart we can see how sluggish our index has been in comparison to the US markets. Whereas the US indices have made new highs our index hasn’t even managed to get to the high made in April 2010.
The above chart however does show us 3 distinct channels that have been operating on the XJO in the medium and short term. I intend to use these channels as ‘measuring sticks’ in order to determine the weakness or strength of the index.
Based on the ASX200 futures contract we can expect that all three channels (orange, red and blue) should remain in play early Monday morning. Note that the lower boundary of the red channel is located near the 4710 level which has a strong confluence with the 61.8% Fibonacci retrace level of 4700.63 mentioned previously.
The XJO weekly planetary chart indicates that a Neptune line also acted as overhead resistance to our index (as it did for the S&P500) having touched it on an intra week basis before pulling back. Note that support for the XJO comes from Saturn planetary lines somewhat lower than our 4700 Fibonacci level.
Materials Sector (XMJ)
As I have often said in past market wraps, the materials sector has been one of the heavy lifters in our index. It managed to break through the April highs in early November 2010 and again in early December.
We can see from the daily chart below that the sector has been trading in a strong blue channel the 21st May 2010. However for the first time we have seen a double top form. This could indicate that the sector is starting to weaken and it will be interesting to see what happens both at the red channel (first indication of problems) and the blue channel lower boundaries. A break of the blue channel in particular would indicate that a retracement at a higher level could be starting.
Financials excl. LPTs Sector (XXJ)
Unlike the strong trend exhibited by the XMJ, the XXJ has been trading in a sideways moving channel with a slightly rising lower boundary. The internal red trend lines show a short term compression in the price action and this should lead to a short term break out soon. The short term pattern developing and the momentum indicators (not shown on the chart) indicate that the likely breakout will be in the upward direction.
What is not certain however is whether the upper blue boundary will be breached by any upward movement in the price action.
Last week I suggested that GOLD was sitting on the edge. This week I would suggest that GOLD is slipping further into problems. The following chart clearly indicates that the previous ascending red trend line has now become overhead resistance. GOLD broke through the support line we discussed last week after back testing that ascending trend line and is now trending lower.
Looking at the chart, it is possible that we may have a head and shoulder pattern that has broken through the neckline. If the H&S pattern plays out it could take the POG down to around the $1283 level.
The short term trend lines for the S&P500 indicate that whilst things are looking weak and a top may have been put in place at 1296 on the 18th January, there is a chance that the index may still manage some further upward movement. For it to succeed in mounting a further rally, the S&P500 would need to move convincingly above the 1290 level.
If however the 1296 level is the long awaited top then we will get our first indication of trouble if 1275 is taken out by the index. Real problems would be indicated if the 1262~1263 levels were breached.
The Australian market (XJO) currently remains in a number of short term upward trending channels. It does not seem to be in any imminent danger of a deep decline at this stage. We should keep an eye open for breaches of the 4710 and then the 4700 levels. The index remains reasonably safe until these levels are breached.
The information in this market wrap is provided for educational purposes only and does not have regard to any particular person’s investment objectives, financial situation or needs. The information must not be construed as advice to buy, sell, hold or otherwise deal with any securities or other investments. Accordingly, no reader should act on the basis of any information in this market wrap without first having obtained investment J