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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940. His... More
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  • Daily Charts for July 28, 2010 0 comments
    Jul 28, 2010 5:22 PM | about stocks: SPY, DIA, QQQ, USO, GLD, FXI, UUP

    Markets Await Initial Estimate of Second Quarter GDP

    The initial estimate of second quarter GDP will be released on Friday by the US Bureau of Economic Analysis, and with consensus expectations for growth of 2.5%, we believe there is substantial risk of disappointment. Recall that of the reported 2.7% growth in the first quarter, all but 0.9% of it was a result of inventory adjustments. Now that the adjustment process has effectively run its course, we will get our first read on how well the economic recovery is sustaining itself. It is worth noting that the first estimate is just that, an estimate, and it will likely undergo major revisions over the next two months.

    Of course, there are other broad measures of economic activity that suggest the US economy has already returned to contraction, including the Consumer Metrics Institute Growth Index (NYSE:GI), which tracks consumer spending activity on major discretionary purchases in real time. The index is plotted below along with the official GDP number from the BEA.



    Notice both the leading nature of the GI and the fact that it is already well into negative territory and heading lower. If subsequent GDP figures continue to track the GI closely, and we fully expect that they will, the US economy will likely return to contraction by the third quarter of 2010. We will see.

    Durable Goods Orders Unexpectedly Decline in June

    The Census Bureau reported that new orders for manufactured durable goods decreased 1.0% in June, whereas consensus expectations were for an increase of 1.0%.

    "New orders for manufactured durable goods in June decreased $2.0 billion or 1.0 percent to $190.5 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 0.8 percent May decrease. Shipments of manufactured durable goods in June, down two consecutive months, decreased $0.7 billion or 0.3 percent to $195.0 billion. This followed a 0.7 percent May decrease."

    This report continues the pattern of "unexpectedly" poor economic data releases that we have experienced over the past couple of months, and we expect this trend to intensify moving forward.

    Cycle Analysis Primer

    We have recently started providing Cycle Analysis (NASDAQ:CA) of the S&P 500 index, the US 10-year treasury note yield, the US dollar and gold. CA is an excellent complement to standard Technical Analysis (NYSE:TA) because its focus is time, whereas TA is concerned primarily with price. The idea behind CA is that markets have internal rhythms across multiple times frames, and if you are able to accurately identify their short-term, intermediate-term and long-term cycles, you can then forecast when and where tops, bottoms, support and resistance are likely to develop.

    The first step in applying CA to a given market is identifying its cyclical properties. Every market is unique and thus has its own unique rhythms, so a large amount of historical data should be analyzed in order to accurately gauge the cyclical tendencies of a given index. For example, our analysis of the S&P 500 indicates that its short-term cycle has an average period of about 37 trading days. Further, the vast majority of its short-term cycles fall within the range of 30 to 41 days. Once you have established these parameters, it is possible to develop reliable forecasts of where cycle boundaries are likely to occur. The following chart displays the identified Short-Term Cycle Lows (STCLs) of the S&P 500 over the past six months.



    Each cycle low denotes the end of one short-term cycle and the start of the next. Notice that the STCLs are relatively evenly distributed over time. However, it is important to note that time and price are not always synchronized, so every STCL will not necessarily be near a short-term bottom. For example, the STCL that occurred on March 31 was very close to a recent short-term high. Each cycle also has two phases, one following the previous cycle low with an upward bias and one leading up to the next cycle low with a downward bias. However, again, there will be a large degree of variation with regard to both phase duration and price behavior. Take another look at the cycle that lasted from February 8 to March 31. The bullish phase lasted for 26 sessions while the bearish phase only contained 10 sessions. Further, price action within the "bearish" phase actually advanced to a new high. CA is concerned primarily with time and rhythms. Imagine a rubber ball bouncing at regular intervals up and down a series of staircases with varying degrees of steepness and duration. CA merely attempts to identify the points at which the ball makes contact with the ground.



    Of course, the tricky parts of the analysis process are correctly identifying recent cycle lows and developing reliable forecasts for when the next one is likely to occur. It is not as easy as it may appear, and only with the benefit of hindsight can the most recent STCL be identified with a high degree of certainty. Cycle counts often experience multiple revisions before boundaries are well established.

    As with all such chart analysis processes, the application of CA is inherently subjective. There are many different methods that can be employed to categorize past cycle lows and forecast the development of future ones. We use a set of momentum and price oscillator technical indicators to perform our identification and forecasting processes, but there are other ways to employ CA. Like TA, CA helps us to better understand price behavior and develop more reliable forecasts across all time frames. However, also like TA, CA is absolutely not a crystal ball. It is simply another tool that helps us to identify the most likely possibilities, which is ultimately the key to long-term success as both an investor and a trader.

    Stock Daily Chart Analyses

    The following daily chart analyses provide short-term forecasts for the stock markets that we monitor. For intermediate-term outlooks see the latest weekly review, and for long-term outlooks see the big picture update.

    The S&P 500 Index

    The index closed moderately lower today, retreating from recent highs of the short-term rally from early July and returning to the congestion zone in the 1,104 to 1,110 range. Technical indicators are slightly bullish, but the failure to move above the June high is a warning sign that suggests a reversal may be in progress. A break back below the 1,100 level would likely result in a quick move down to uptrend support near 1,090, while a close well above the June high at 1,123 would be required to restrengthen the uptrend.

    We are 17 trading days into the cycle that followed the Short-Term Cycle Low (STCL) on July 2. The July 2 low was also an intermediate-term cycle low, so time is supportive of the current short-term uptrend from early July. However, if the rally struggles as it moves into the second phase of the current cycle, that would be a bearish warning sign indicating that a return to previous lows in the 1,022 area had become more likely. Today's lower close potentially signals a move into the second phase of the current cycle and additional weakness during the next few sessions would confirm the transition.

    A close well above the June high near 1,123 would reconfirm the rally from early July and forecast a move up to congestion resistance at the January high in the 1,150 area. A reversal and close well below the 1,100 level would predict a move down to cyclical uptrend support in the 1,060 area. Both possibilities are equally likely at the moment.

    The European Top 100 Index

    The index closed slightly lower today, holding near recent highs of the uptrend from early July and continuing a test of strong congestion resistance near 222.50. Price action has been confined to a trading range between 203 and 222.50 since early May, and a move out of this area will likely signal the direction of the next meaningful move. Technical indicators remain moderately bullish overall, suggesting that a break above trading range resistance is possible.

    A close well above trading range resistance in the 222.50 area would reconfirm the uptrend from early July and forecast a move up to congestion resistance near 227.50. A reversal and move below uptrend support near 217 would predict a move down to the previous short-term low at 211. Both possibilities are equally likely at the moment.

    The Shanghai Composite Index

    The index closed sharply higher today, breaking above resistance at the top of the trading range from June and reconfirming the uptrend from early July. Technical indicators are now bullish overall, supporting a continuation of the rally. The next meaningful resistance level is a congestion zone near 2,700.

    A close above current levels would reconfirm the uptrend from early July and predict a move up to congestion resistance near 2,700. A quick reversal and move back below the 2,600 level would predict a move down to the bottom of the trading range near 2,500. The uptrend continuation scenario is more likely (~70% probable).

    Treasury Daily Chart Analyses

    The following daily chart analyses provide short-term forecasts for the US treasury markets that we monitor. For intermediate-term outlooks see the latest weekly review, and for long-term outlooks see the big picture update.

    The US 10-year Treasury Note Yield

    Yields closed moderately lower today, moving back down to resistance at the upper boundary of the downtrend from April. The downtrend remains in control for the moment, and yields have moved down to a new long-term low even as stocks have rallied sharply over the past three weeks. A break above congestion resistance near 3.11% would be required to confirm the start of a sustained reaction. Technical indicators are effectively neutral, and a slight positive divergence between yields and both momentum and oscillators results in a neutral to slightly bullish condition overall.

    With respect to cycles, we monitor cycle highs in yield as they correspond to cycle lows in price. We are 11 trading days into the cycle that followed the Short-Term Cycle High (STCH) on July 13. The next cycle high is due during the first or second week of August, and if yields continue to struggle near recent lows until then, another long-term breakdown would be forecast.

    A close above congestion resistance at 3.11% would confirm the start of a short-term uptrend and predict a move up to congestion resistance in the 3.18% area. A close below the recent low near 2.89% would reconfirm the downtrend from April and forecast additional losses. Both possibilities are equally likely at the moment.

    The US 30-year Treasury Bond Yield

    Yields closed slightly higher today, holding below previous highs of the short-term uptrend from early July. Unless yields are able to break well above the congestion resistance near 4.10%, the downtrend from April will remain in control. Technical indicators are neutral to slightly bullish, and a slight positive divergence between yields and both momentum and oscillators results in a slightly bullish condition overall.

    A close above congestion resistance near 4.10% would confirm the start of a new short-term uptrend and predict a move up to congestion resistance in the 4.25% area. A close below the recent low near 3.87% would reconfirm the downtrend from April and forecast additional losses. Both possibilities are equally likely at the moment.

    Currency Daily Chart Analyses

    The following daily chart analyses provide short-term forecasts for the currency markets that we monitor. For intermediate-term outlooks see the latest weekly review, and for long-term outlooks see the big picture update.

    The US Dollar Index

    The index closed near unchanged today, holding at recent lows of the downtrend from June and continuing a test of congestion support near 82. Technical indicators continue to repair themselves, and they are now neutral to slightly bearish overall, suggesting that at least a short-term bottom may be in the process of developing. A close well below congestion resistance in the 82 area would be required to restrengthen the downtrend from June.

    We are 8 trading days into the cycle that followed the Short-Term Cycle Low (STCL) on July 18. An intermediate-term cycle low is due in early August, so it is possible that price action will exhibit bottoming behavior over the next couple of weeks. It will be important to monitor the index as it passes into the second phase of the current short-term cycle during the next several sessions for signs of a turn higher.

    A close above downtrend resistance near 83.50 would predict a move up to congestion resistance at the 85 level. A close well below congestion support in the 82 area would reconfirm the downtrend from early June and forecast additional losses. Both possibilities are equally likely at the moment.

    The European Euro Index

    The index closed near unchanged today, holding at recent highs of the short-term uptrend from early June. Technical indicators continue to exhibit signs of fatigue, although they remain slightly bullish. A failure to move up to a meaningful new high over the next several sessions would suggest that a return to uptrend support is likely, while a close well above congestion resistance in the 130 area would be required to restrengthen the uptrend.

    A close well above current levels would reconfirm the uptrend from June and forecast additional gains. A close below the recent low near 127.50 would predict a move down to uptrend support near 125.90. Both possibilities are equally likely at the moment.

    The Japanese Yen Index

    The index closed moderately higher today, moving back up toward power uptrend support of the rally from early May. Technical indicators continue to exhibit signs of fatigue and are effectively neutral overall, indicating that a move down to recent short-term lows has become more likely. A close well above the recent high near 117 would be required to restrengthen the move.

    A close above the recent high near 117 would reconfirm the uptrend from May and forecast additional gains. A close below the recent short-term low at 113.70 would predict a move down to uptrend support in the 112.80 area. Both possibilities are equally likely at the moment.

    Precious Metal Daily Chart Analyses

    The following daily chart analyses provide short-term forecasts for the precious metal markets that we monitor. For intermediate-term outlooks see the latest weekly review, and for long-term outlooks see the big picture update.

    Gold

    Gold closed slightly higher today, reacting off of recent lows the downtrend from late June and continuing a test of support at the lower boundary of the long-term uptrend. Technical indicators remain moderately bearish overall, supporting a continuation of the downtrend, but a short-term bounce should occur sometime over the next two weeks as both short-term and intermediate-term cycle lows are scheduled to occur.

    We are 16 trading days into the cycle that followed the Short-Term Cycle Low (STCL) on July 6. The next STCL is due by the first week of August and an intermediate-term cycle low will also likely occur sometime over the next two weeks, supporting the formation of at least a short-term bottom during that time.

    A close above new congestion resistance in the $1,180 area would predict a move up to congestion resistance near $1,200. A close below uptrend and congestion support at current levels would reconfirm the downtrend from late June and forecast a move down to congestion support at the $1,140 level. The downtrend continuation scenario is more likely (~70% probable).

    The Gold Currency Index

    The Gold Currency Index (NYSE:GCI) is a composite of gold prices in the currencies of 10 of the largest economies in the world as defined by GDP. It is therefore currency independent, reflecting the intrinsic value of gold as an international currency itself.

    The GCI closed slightly higher today, holding near recent lows of the short-term downtrend from late June. Technical indicators remain moderately bearish, supporting a continuation of the downtrend, but a short-term bounce should occur sometime over the next two weeks as both short-term and intermediate-term cycle lows are likely to occur.

    A close above downtrend resistance at 29.85 would predict a move up to congestion resistance in the 30.40 area. A close well below current levels would reconfirm the short-term downtrend from early July and forecast additional losses. The downtrend continuation scenario is slightly more likely (~60% probable).

    The Gold Miners Index

    The index closed slightly higher today, reacting off of recent lows of the short-term downtrend from late June and continuing a test of strong congestion support in the 1,300 area. Price action has been confined to a trading range between 1,300 and 1,500 since May and a move outside of this range will likely signal the direction of the next meaningful move. Technical indicators remain moderately bearish overall, indicating that a break below trading range support is relatively likely.

    A close well above the recent short-term high at 1,360 would predict a test of congestion resistance in the 1,400 area. A close well below current levels would reconfirm the downtrend from late June and forecast substantial losses. A break below trading range support is slightly more likely (~60% probable).

    Commodity Daily Chart Analyses

    The following daily chart analyses provide short-term forecasts for the commodity markets that we monitor. For intermediate-term outlooks see the latest weekly review, and for long-term outlooks see the big picture update.

    The CRB Index

    The index closed moderately higher today, holding below recent highs of the uptrend from early June. Technical indicators are slightly bullish overall, but price action has failed to move above congestion resistance near 267.50 for four sessions, suggesting that a reversal may be in progress. Another move to meaningful new highs would be required to restrengthen the uptrend.

    A close well above congestion resistance in the 267.50 area would reconfirm the uptrend from June and forecast additional gains. A close below new congestion support near 263 would predict a move down to congestion support at the 258.50 level. Both possibilities are equally likely at the moment.

    Oil

    Oil closed moderately lower today, retreating from recent highs of the uptrend from late May near strong congestion resistance in the $80 area. Technical indicators are now effectively neutral, and the failure to move meaningfully above the late June highs indicates that a reversal may be in progress. A strong close well above $80 would be required to restrengthen the uptrend.

    A close well above strong congestion resistance in the $80 area would reconfirm the uptrend from May and forecast a move up to congestion resistance near $83.30, while a close below nearby congestion support at $76 would predict a move down to uptrend support at $73.80. Both possibilities are equally likely.



    Daily chart analyses are posted after the close of every market session at Prometheus Market Insight.

    Disclosure: No positions
    Stocks: SPY, DIA, QQQ, USO, GLD, FXI, UUP
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