Friday, July 31, 2009

Daily Comment July 31, 2009

End of the week:

Technical Preview:

Talk about being completely wrong on the 3-4% correction. Well at least my trades are still on the right side. Either way, even with the drop it wasn't much of an opportunity to benefit from adding to a position or opening a new one as the drop was only around 1%.


I should have remembered my friend sauros saying the RSI tends to go oversold at least twice before a reversion to the 50 line (parameters on default). With this being said, its hard to believe another correction is in place as if one back tests to mid 2005 to mid 2006 we see a clear up trend and many times that the RSI touched the 50 due to 2 - 3 bearish days alone.

The best indication to see if the RSI is indicating a trend change would be to look to SMA formation. Currently we are getting very strong bullish formation in the SMAs with all the long term SMAs under their shorter terms counterparts.

Back testing in the mentioned time frame from above shows that time periods that the RSI was oversold only led to .8 - 1.4% Drops on the S&P500 in one day and over a few days the largest drop seen is 2% (but this was due to a much longer time frame of the RSI being over extended).

So compared with the past days this week, 7/28 and 7/29, we saw 1.3% and .9% decreases respectively and combined a 1.31% drop (open to close). At this point we will mostly likely see a continued upward trend and the RSI to revert back to the 50 line which means a lot of small down days a head (if continued with lower highs this is more confirmation for a continued bullish trend).


One should watch the MACD carefully for a convergence of averages as this would confirm a 2%+ drop if the RSI is in overbought territory, if not, it is just oscillating from lower highs.


I will put a price target of 1010 until it meets Resistance. Over the next week if the RSI does go on a path back to 50 this will be a smooth trend up. However if the RSI tends to stay in overbought territory a more significant correction of 2% + will be warranted (considering the fundamentals of earnings this scenario is possible).

Inter market Analysis and Considerations:


The correction in oil was beautiful for the bulls. It would seem that ICE Brent Crude is leading NYMEX Crude. Either way both are still confirming bullish moves in equities on a technical level.


EUR correction may have been exaggerated but great support for the bulls, the Pound and Aussie maybe reaching oversold levels and may warrant correction. Watching these two pairs and any affects seen in the equity markets is worth while.

The CAD beautifully went in line with the "equity correction" and bounced off support but is overall still in a down trend (a.k.a dollar weakness).

And again we are seeing a low correlation of the eur/usd vs the jpy/usd of .35 . I still opt out on trading the yen.

Overall, currencies are still in line with a bullish thesis on equities though, some major pairs may question this.

Long vs Short term UST:

US Treasuries are telling an interesting story. From the charts that I am looking at it seems the spreads have tightened. Perhaps this is profit taking from the recent strong performance this past June in the bond markets. Either way if the spread continues to tighten, it may confirm a more significant drop on the S&P500. Or perhaps indicating the overall longer term trend.


Gold is another interesting story, talking to some traders today, some say that the spike in prices today was lead by gold markets.

Some cited possibly a large buyer in the SPDR Gold Trust.

I was considering GDP data as a mover but this would not make sense since GDP was worse off then expected, unless people some how became more bullish on the economy and were citing inflation fears.

If inflation were a driver in this environment we would definitely see a strong sell off in the bond markets and a much larger spike in gold, so I dont think short term movements are coming from inflation worries.


Overall inter-market analysis is telling me to maintain my bullish view. Though, its possible that if equities stay oversold we may get a signficant drop of around 2%, which if the S&P500 is not at the 1000+ levels one can add in or open a new position depending on their price target.

I am saying a price target of 1010 before resistence. At which I will reasses for new trend developments.

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