Here we are again. Back into major resistance levels from which the overall market has failed to break out and move higher since the October bottom.
We got a strong participation up day last Tuesday, which technically can be interpreted as a buy signal, but we need to see stronger confirmation with a solid breakout over resistance in the major indexes to see if this is finally for real.
The S&P 500 is hitting its 200 day moving average today, a level it has headbanged and failed constantly. For a new, longer duration uptrend to start in the markets we need to take out this level with conviction and volume.
The Dow Jones Industrials looks a bit better, trading over its 50-150-200 day moving averages and forming a inverted head and shoulders pattern with a neckline at 12.250 which is resistance.
The NASDAQ has more work to do. It is facing resistance at 2600, which was a former support area, plus from its 50-150-200 day moving average which are trading above. A strong NASDAQ leading gains is key to start a new market uptrend.
In all the indexes we have been making higher lows since the October bottom and various high Up/Down volume up days but price, which is the ultimate judge, still has to display strength. We have seen quality stocks setting up for breakouts that then constantly fail as the market reverses from resistance.
Two other assets that I'm tracking that are a key "tell" about the next major move in the markets are the Dollar Index (tracked by the ETF UUP) and longer term treasuries (tracked by the ETF TLT).
With the end of QE the dollar has been basing since May and attempted to breakout recently which then failed, sending markets higher.
I think that going forward the FED will launch once again some sort of QE but until then, the dollar should remain firm and could rally higher which would be bearish for equities, commodities and precious metals. For a new market uptrend to begin we need to see the Dollar stay put and fail to break out higher with strength.
Treasuries are usually called the "rich men's cash" as major players in the market such as mutual funds and hedge funds park their money there when they are bearish in the stock market and sell stocks.
The US government has over 15 trillion in debt, a 100% Debt/GDP ratio, borrows 40 cents for every dollar spent and lost its AAA rating back in August. Despite all of that, treasuries are at record highs and are offering historically low yields.
This shows fear in the market, that institutions are under invested in stocks and that the market perceives the US debt as the best of the worst of "risk free" assets.
The chart of TLT shows that is forming a pseudo "triple top" pattern and some topping characteristics.
Bottom line:
The market looks like it could break out higher but has failed to prove its strength when it counts. Despite the grim situation in Europe, the market can look beyond it or discount things that we still don't see and move higher.
Keep your watchlist ready in case it decides to start a new uptrend despite the bearish news and comments that have flooded the market during 2011.
Best regards,
Victor Riesco