Friday, June 26, 2009

Important Juncture

The markets have reached a critical juncture: either the correction from the June high is over or another leg down should be underway fairly soon next week. The fly in the ointment is that the period ahead of and after 3 day weekends tends to be bullish. The day after the July 4 holiday is often decidedly bullish. So, if the downtrend doesn't begin in earnest soon, it would be hard to see how the market could still be in this correction.
That said, several things point to lower prices: 1) the Qs were up this week but on declining volume (today's volume was the lightest of the week, 2) the Dow and SP500 both had narrow range days today, which should lead to a breakout in volatility (one way or the other), 3) today was an expected turn date which coupled with the narrow range bars could be pointing to a turn down on Monday, 4) the volatility indexes made new lows but the indexes did not make new highs (a bearish divergence), 5) the bearish divergence MACD sell signal is still in force, and 6) the markets have been rising with gold, which appears to have completed a 3 wave rally and is set to turn back down.
In addition, the EUR/JPY currency cross has been a good leading indicator for the stock market for several months. As the above chart show, it has recently completed 5 waves down from its June high. It may rise another day or two, but the downtrend looks set to resume soon, which should lead to further declines in the stock markets.
Curiously, the high in the Qs today was 36.50 which was exactly the high on June 1, meaning there has been little progress for the month. Will 36.50 prove to be strong resistance?
Fortunately, as I have been partially short the indexes via ETFs such as the QID, I have also been long several stocks: SOHU, ORCL, MEA e.g and my account has been relatively flat.
My expectation is that we will see the correction continue into mid July, but should the Qs form a proper pivot with a pullback, I will go long. Better to buy back in at a higher price than to miss the next rally, but I will need to see more evidence before I am ready to take that step.

3 comments:

dave said...

"...The fly in the ointment is that the period ahead of and after 3 day weekends tends to be bullish. The day after the July 4 holiday is often decidedly bullish. So, if the downtrend doesn't begin in earnest soon, it would be hard to see how the market could still be in this correction."

Agree, but OTOH moves that go against seasonal trends can be powerful similar to "From failed moves, often come fast moves (in the opposite direction)"

Regards,
dave

R. Craig Pritchard said...

Yes,

Failed moves are often powerful signals, and there have been some dramatic swings around the July 4th holiday.

My biggest concern about the short side is that the post-election year cycle pattern has worked very well this year so far, and I am hesitant to fade it heavily.

dave said...

"4) the volatility indexes made new lows but the indexes did not make new highs (a bearish divergence),"

From a Bespoke commentor:

"the VIX is a leading indicator"
Not always. Just before the last year big fall S&P500 topped on 8/11/2008 and VIX bottomed on 8/22/2008. 9 days later.
Current situation is quite similar.

Posted by: Rezeda | June 26, 2009 at 09:12 AM

Regards,
dave