The USD index has broken through a blue descending trend line and has the appearance of a WXY corrective pattern forming. If true this would indicate that the USD could rise further which could give downward pressure on commodities and US equities. Wave W took 18 trading days to form and wave Y has been underway for 4 trading days. If they form in similar periods then we could see the USD rising for another 14 trading days.
Note that in the above comments I suggested that a rising USD could give downward pressure on commodities and US equities.
I emphasise the word could because whilst many people believe that the USD has an inverse relationship with commodities and the US equities, it does not always do so as is shown in the following chart comparing the USD index and the S&P500 index.
The comparison chart clearly shows that there are times when there is an inverse relationship between the two indices and other times there is a direct relationship. I suspect though that in the short term these two indices will probably establish an inverse relationship.
XJO VERSUS S&P500 PERFORMANCE
In the last week the S&P500 gained 13.86 points (1.10%) whereas the XJO dropped 40.2 points (-0.85%) so the Australian market continues to perform like its cricket team relative to the US market. If we re-priced the S&P500 from USD into AUD it in fact would have dropped 1.49% which would have meant that the Australian market would have outperformed the US market. This gives an indication of what happens when you don’t compare markets on the same basis and should remind investors that “appearances can sometimes be illusory”.
The S&P500 index continues to rally with very small retracements. The MBB (20 day SMA) has provided support for much of the rally since September. Last night it closed down at 1271.5 after reaching a peak at 1276.83. The peak was below the peak achieved on the previous day at 1278.17. There are various EW counts available for the current rally ranging from a 5th wave in the process of completion (or having completed on Thursday) to the index being in a triangle pattern for a 4th wave which will eventually kick up to complete the rally in a 5th wave.
I can see arguments for both cases and am prepared to wait to see which count proves correct.
The above chart shows that the W%R14 indicator has presented us with an initial sell signal however I would wait until the MBB (20 day SMA) is broken for confirmation.
If it does turn out that there is a little bit more left in this rally, the following chart showing past and potential future resistance levels may give us a clue as to where the top may complete. Currently the next significant Fibonacci overhead resistance is at 1291. This is the 50% Fibonacci extension of the previous significant rally.
The fact that this Fibonacci extension has provided good resistance levels in the past is a good indication that the 1291 level should be a relatively strong overhead resistance level.
The following S&P500 planetary chart showing the blue Saturn lines and orange North T Node lines shows us that the index is currently being stopped by the Saturn lines. They are currently presenting a considerable overhead resistance for the index. The index has tested the ascending Saturn line once and failed. It remains to be seen whether a second test is on the cards.
The ADRs on the NYSE have BHP down 0.69%, RIO up 0.45% and WBC up 0.06% which is a mixed bag of results that doesn’t really give us much of a lead as to what the XJO will do on Monday morning. The ASX200 futures contract gives a much more definitive lead in that it is currently suggesting a fall of around 17 points. That would give us a target level of around the 4688 which is just shy of the 50% retrace level of the last significant rally.
The following XJO weekly planetary chart showing the blue Saturn lines and the orange North T Node lines also give us a target level of around the 4670.
To get an idea about what is happening with the XJO we need to look at both the daily and the weekly charts.
The daily chart below shows us that the LBB is located at the 4686 level (close to the promised ASX200 futures figure of 4688) and the W%R indicator is indicating a slightly oversold condition which may lead to a bit of a rally.
When we now look at the XJO week chart we can see that the XJO has been supported by the MBB (20 week SMA currently located at 4656) since late August but that the W%R indicator is on the way down which could indicate a test of the MBB in future.
Remember that the lower Saturn line in the XJO planetary chart is located at around the 4630 level which indicates that the test of the MBB is a distinct possibility before this decline is completed.
At this stage of the cycle I continue to believe that the decline will possibly continue until late January/early February with the normal run of short periods of counter rallies forming during this period.
Materials Sector (XMJ)
As mentioned in previous market wraps the XMJ has been the major contributor to the rise (regardless of how sluggish) in the overall XJO.
We can see from the previous weekly chart of the XMJ that the sector continues to rise in the lower half of the ascending channel but at the same time in the upper half of the Bollinger Band channels. The MBB (20 week SMA) has been a strong support for this sector but we can see from the W%R indicator that weakness has crept into the sector at this time after toying around with price levels not seen since August 2008.
Financial Sector including LPTs (XXJ)
The weekly chart of the XXJ however shows just what pressure the sector has been under since May 2010. What was previously a support level (indicated by red horizontal line) has become resistance for the sector. The sector has once again fallen through the MBB and the W%R indicator is also showing weakness.
For this sector to contribute to any future rally after the current decline completes the price action since May will have to have been building a platform from which to bounce. The crimping of the BBs does indicate that pressure is building towards a significant price move. It remains to be seen in which direction this move goes.
S&P500 continues to tease both bulls and bears as it slowly climbs its upward trajectory with only very small retracements. As stated previously I can see arguments for either a top almost in place or yet another move to the 1291 level. Whilst I get the feeling that we are very close to a top or may have seen it on Thursday I find it impossible to call a top and am happy to wait patiently.
On the other hand the XJO continues to plot out its downward journey and whilst there may be the odd rally that will no doubt take place in the next few weeks I suspect that the downward journey will continue for the time being.