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G4 Weekly Market Wrap, January 14th 2011

  • Written by Syndicated Publisher 65 Comments65 Comments Comments
    January 15, 2011

    The USD index in my view is the key to the future direction of the market at this stage of the cycle. Last week I provided a chart of the USD index that appeared to be making a simple abc corrective wave before resuming its upward trend. The price action in the past week has proven that the corrective wave was slightly more complex and at this stage it looks like an abcde corrective pattern.

    On the basis of the proximity of that last candle to the LBB and the W%R14 indicator moving into the oversold territory it is likely that the USD index is getting close to a bottom and the termination of the ‘e’ wave.

    If the index ‘plays ball’ with EW patterns we should then see the start of a rally with a resultant downward pressure on the equities market.

    The following 60 minute chart appears to show that there is some support at the current levels and hence we could see a base forming from which to launch another move upwards.

    US MARKET

    There are many Elliott Wave counts on the S&P500 and by far the majority of them are calling for a top to be put in place in the near future however the index refuses to comply.

    The following chart clearly show that the S&P500 is currently in a strong upward trend with all of the key moving averages (20, 50 and 150 day SMAs) all pointing upwards. We can see that there is a slight divergence in the Twiggs Money Flow (TMF) indicator (red line) but the more recent blue line is making an attempt to overcome that divergence. The fact that the TMF is positive and climbing shows that there continues to be strong buying pressure on the index at this point in time.

    Note that the 20 day SMA has provided short term support for the index since early September and was only breached for a short period between the 16th November and 1st December 2010. At this time the 50 day SMA stepped in to provide additional support.

    For a breakdown in the rally to be evident we would have to see those two SMAs breached. Currently the 20 day SMA is located at 1266.19 and the 50 day SMA is at 1233.71.

    In an attempt to see if there are overhead resistances presenting themselves I have looked at 3 different time frames for the S&P500 using both the Bollinger Bands and W%R14 indicator as measuring sticks.

    This chart shows us that the index is in overbought territory in the W%R14 but the BBs are expanding upwards with the current UBB at 1295. The all important 20 SMA is located at 1289. The LBB is located at 1283 which is a strong support level as can be seen by the previous bounce levels.

    This chart also shows expanding BBs with the current UBB located at the 1297 level. The MBB is at 1281 and the LBB is at 1264. Once again the W%R14 is well and truly in overbought territory.

    The daily chart once again shows expanding BBs with the current UBB located at 1292. The MBB is at 1266 and the LBB is at 1241. The W%R14 is once again in overbought territory.

    Summarising the Multi-Time Frame Analysis

    Based on the multiple time frames analysed we can see that all time frames consistently point to the current upper limit for the current rally to be around the 1292~1297 zone. It also shows that the W%R14 momentum indicator is in overbought territory. Now momentum indicators can saturate and continue in either overbought or oversold territory for some time. However, at least it tells us that danger lurks.

    The analysis does indicate that we are very close to a top as the index closed at its high of 1293.24 in its last trading session which is already in the zone mentioned above.

    The Astro chart below of the S&P500 shows that the index was constrained by a Neptune line at 1293 last night. The next Neptune line is at 1317 but on the basis of the above analysis this may be a level for another time. Whether the index wants to attempt it this time remains to be seen.

    AUSTRALIAN MARKET

    With the S&P500 closing up 0.74% in its last trading session the ASX200 futures contract is currently suggesting a move up of 14 points on Monday’s open. What is a little strange is that the ADRs on the NYSE had BHP down 0.41%, RIO down 0.24% and WBC up 0.30% which appears to contradict the ASX200 future contract figure.

    The figures do appear to be consistent with what happened in the Australian market on Friday however I suspect that the lead from the S&P500 will prove to be the more accurate pointer to the XJO price action on Monday morning. With Friday’s close of 4801.5 the 14 point move up would target a level of 4815.5.

    Unlike the S&P500, the advance of the XJO has been more sluggish but nonetheless it has been moving in an ascending channel since early July. In the XJO the 20 day SMA has not been providing the same sort of support experienced with the S&P500 and it has been the 50 day SMA that has been providing the main support. The price action has in fact been oscillating about the 20 day SMA. The longer term 150 day SMA finally turned upwards at the end of November.

    We can see from the TMF that there has been very strong buying support in recent times. In fact we have a slight positive divergence in this indicator. Whilst many EW analysts are suggesting a significant plunge in the near future, this is not showing up in the chart below at this time.

    Once again I thought it worthwhile to carry out a multi-time frame analysis on the XJO as done for the S&P500.

    XJO 20 minute chart

    This chart indicates that we had just gone through a squeezing of the Bollinger Bands which usually leads to a significant move. The expanding BBs indicate that the move may have started. Currently the UBB is located at 4800 but the anticipated move up on Monday and the W%R14 indicator with “room to move’ in overbought territory will no doubt push that upper limit upwards.

    Currently the MBB is providing support at the 4791 level and the LBB of 4783 looks like a legitimate support level based on previous lows in the chart.

    XJO 99 minute chart

    This chart’s UBB figure of 4823 probably gives us a better idea of the likely move in the short term. The MBB level of 4742 gives us a reasonable medium term support level should a retracement occur with the LBB of 4661once again giving us an indication of where a larger retracement would take us. We can see here that the W%R14 indicator is showing an overbought indication at this time.

    XJO daily chart and Astro chart

    The following two charts confirm that any move up in the next trading day or so may take us as high as the 4827 level (see Astro chart) which is in the ball park provided by the 99 minute chart figure of 4823.

    The 99 minute chart has the UBB currently located at the 4819 level with the MBB at 4756 and the LBB at 4693. The Astro chart has a Saturn line support at 4670 which suggests further weakness than that indicated by the 90 minute LBB figure.

    What I find interesting in the 99 minute and daily charts is that the LBB of the 99 minute chart is much lower than that given by the LBB for the daily chart. This is not the usual case.

    Summarising the XJO charts

    As with the S&P500, the charts suggest that there is still some future short term upside to the XJO. The potential target zone is 4823 to 4827. Again, as with the S&P500 the target zones are ‘within a stone’s throw’ of the current price action.

    This does appear to suggest that a top for the S&P500 and XJO is potentially only days away.

    Price of Gold (POG)

    The favourite of many investors in recent times, gold is starting to look vulnerable from a technical perspective. It is currently sitting on the edge of a precipice and the commodity cannot afford to drop much further or it will enter into a significant slide down a slippery slope.

    Working in its favour is the fact that it is close to the LBB at present and the W%R14 is close to oversold territory. A drop below the low set on the 22nd October 2010 of $1315.50 would more than likely precipitate a significant drop.

    Summary

    The XJO and S&P500 continue to creep higher and look to be in quite strong trends. However the market internals continue to show significantly overbought conditions. The markets need to have a rest in order to either consolidate or retrace in order to recharge these overbought indicators. I’m not sure which route the markets will take to achieve this end. Certainly most EW analysts suggest a retrace of some significance. At this stage however the trends do not show any signs of this yet.

    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
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