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Bad Moon Rising?…G4 Weekly Market Wrap, 20th May 2011

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    May 21, 2011

    In last week’s Market Wrap I suggested the following:

    “The US market is poised to either bounce from existing levels or have a bit more of a move down before commencing the rally that investors have been patiently waiting for during the last couple of weeks. G4 do expect that if the bottom is not in already then it soon will be. Where the market will be by the end of the week relative to Monday’s market open will depend on the anticipated bounce.

    For the Australian market we anticipate that there will be a negative start to the week but the cycle should bottom by mid week with a move up commencing from that time.”

    As suggested above the S&P500 bounced on the 17th May from a low of 1318.51 and topped out on the 19th May at 1345.21 (2.03% up). The index finally closed the week off at 1333.27 which was 4.5 points below the close of a week ago.

    The Australian market did start the week negatively but found the bottom on Monday at 4641.4 and rallied finally top out at 4763.9 on Thursday a gain of about 2.64%. The XJO finished the week at 4732.2 which was 20.84 points up from the close of the previous week.

    I thought that the following Chart of the Day was of interest this week in view of G4’s view that things are about to turn sour for global markets in the near future.

    CHART OF THE DAY

    The US real estate market continues to struggle. For some perspective, today’s top chart illustrates the US median price (adjusted for inflation) of a single-family home over the past 41 years while today’s bottom chart presents the annual percent change in home prices (also adjusted for inflation).

    Today’s chart illustrates that, prior to the financial crisis, the inflation-adjusted median home price rarely declined more than 5% in one year (gray shading). It is also very important to note that due to a large number of distressed properties, a high unemployment rate and stagnant wages, the inflation-adjusted median home price has declined 7.9% over the past year — an annual decline larger than any that occurred during the 35 years prior to the financial crisis.

    US MARKET

    The following daily chart shows us that there is a bearish divergence between the price action and the LOI. We can also see that the index is trading in a declining channel at the present time.

    Readers will recall that G4 has been suggesting for a number of months now that the rally that started in March 2009 was drawing to a close. We have also mentioned many times that the most likely period for the top to occur is in the period of the 6th ~ 13th June but that due to the slippage that occurs in any type of cycle analysis the top could occur a month or two either side of those dates. For this reason we should always keep an eye open for the possibility that the top could come early or (in the worst case) could already be in place.

    It can be clearly seen from the above chart that the LOI remains on a sell signal and shows no signs as yet of changing direction. For the bulls, it is extremely important that the green and blue ascending trend lines on the price action remain unbroken or things could get quite negative very quickly.

    In order to get some idea of what may be in store on the daily chart we need to drill down and look at the shorter time frames. The following 60 minute intraday chart is not quite as bearish as the daily chart in spite of there still being a sell signal on the LOI. At this time frame we have reached the LBB and the price action and LOI are showing a slight positive divergence. We also have some previous support lines (blue) at the current level.

    Drilling down even further into the 15 minute intraday chart we once again see that the price action is close to the LBB. What is somewhat troubling is the fact that there is still a sell signal on the LOI.

     

    In an attempt to get a better insight into what may be happening we now go to the weekly planetary chart for the S&P500.

     

    The planetary chart also gives me some concern because we can see that the price action has hit a ceiling in the form of the Saturn line. It has obviously become an overhead resistance at this point in time and the only support is at 1321 in the form of the Neptune line. The index needs to urgently recover that Saturn line to avoid a large decline.

    So we can see that both the traditional technical analysis and planetary charts give us a somewhat negative picture. The only positive sign that may come into play is the influence of the lunar phases. Statistically, the Full Moon to New Moon period is the most positive phase for equity markets. Unfortunately statistics by their very nature deal with averages. Hence in amongst the data there may be both positive and negative data that combined turn out to be positive “on average” for the complete data set. That doesn’t remove the possibility that we may end up with one of those negative periods in the current FM to NM period. Bulls can only hope that this will not be one of those periods.

    AUSTRALIAN MARKET

    The lead from Wall Street currently has the ASX200 futures contract suggesting a drop in the XJO of 39 points on Monday’s open. The ADRs on the NYSE had BHP down 0.7%, RIO down 1.22% and WBC down 1.64% but we should recall that some of the downside that was in these stocks in the XJO’s last trading session may be built into these prices. Regardless though, the indications are that we should expect a negative open for our index on Monday.

    We can see from the daily chart of the XJO that the index continues to trade within a rising blue trend channel but that we are currently in a descending red channel. From the perspective of the bulls, we need to hold that blue trend channel to keep the medium term rally in place. The LOI appears to have lost its downward momentum at this stage but it will be interesting to see what next week’s price action does to the indicator.

     

    The 60 minute intraday chart shows that the LOI is on a clear sell signal and Monday’s down day should ensure that we breach the MBB. One encouraging sign however is the positive divergence between the price action and the LOI in the last couple of weeks.

    The following 15 minute intraday chart shows that the index moved from a low of 4641.4 to a high of 4763.9 in what could be considered an impulsive move up.

    The move down from the peak could be considered the first wave of a 3 wave move down (an ‘a’ wave) and the move in the horizontal direction could be considered the second wave (a ‘b’ wave). If we get the 3rd wave equal in length to the first wave then we would be completing close to the 50% Fibonacci retracement level at 4702.7.

    If the anticipated ASX200 futures contract of a 39 point drop is correct then that would put us at around 4693.2 which is between the 50% Fibonacci level and the 61.8% Fibonacci level at 4688.2.

    If I have read the pattern correctly then there should not be too much more downside than that.

     

    The weekly planetary chart for the XJO shows us that we are above the Saturn line at 4693. Note that this is close to the anticipated ASX200 futures level. That is promising for the bulls as the Saturn line could be a good support for the XJO in the coming week.

     

    SUMMARY

    It should be a very interesting week next week. One big question that will be answered is what effect will the positive Full Moon to New Moon influence have on the market?

    To me the S&P500 looks as though it will require a lot of help if it is to survive what could be a negative week. The XJO on the other hand could survive a negative start early in the week if that Saturn line provides support. If it doesn’t then it’s quite a drop to the Neptune line at 4610.

    Readers should be aware that the New Moon will occur on the 2nd June. New Moons are very often close to market tops so it would be a good time to put an end to the March 2009 rally in the S&P500. This doesn’t give it much time to pull out of its current negative technical’s in order to stage a rally into that time period. This even calls into question whether the earlier high of 1370.58 can be exceeded in the time left to form a top.

    As far as the XJO is concerned, I suspect that we have already seen the top of the March 2009 rally and that if there is a good rally it will probably fall well short of the previous high of 5025.1.

     

     

     

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