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Friday Roundup: Commodities, Emerging Markets

The markets are devilishly incomprehensible most times.

That is just the way it is; otherwise Dow Jones could be at 100,000+++ by now or be close to zero if it was so predictable or too easy to understand.

Another analysis could be this:

The SnP500 has a high side of 1300 at the start of July-Sept 2008 quarter. Before the earnings season started in Oct 2009, it was able to reach 1100. A 15% difference YOY high on a QxQ comparison.

Viola! SnP500 is on tract for a 15% YOY drop in earnings.

Big investors had been pricing in the 15% difference before the start of the earnings season or was it co-incidence? And on the high side of July-August 2008 quarter?

This bodes well for the next quarter stock market run from an investor's point of view.

Going forward:

If they believe that the Oct-Dec 2009 quarter will get better; then move the parameters back YOY going back into April-June 2008 QxQ SnP levels which has a high side of 1400. Then SnP could be at the 1300 area just assuming the 15% profit differential will narrow down to half or be at 1400 if their estimates show full recovery within this year.

Then SnP could be at the 1300 to 1400 area before the start of the earnings season in Jan 2010.

On the downside; if something realy bad happens like that of 9/11 episode. Then backtract YOY going forward to Oct-Dec 2008 QxQ then SnP could drop hard to the 800 area before the next earnings season starts in Jan 2010.

Does this analysis makes sense or what?

Friday Roundup: Commodities, Emerging Markets

We are now at an inflection point since the grueling run from Aug 25 toward Oct 30, 2009.

Either we keep breaking down toward the 992 area for SnP500 as indicated by the volume spike on daily chart by DIA, SPY, and QQQQ last Friday;

Or, we go straight up toward 1270 to 1330 area if a reversal happens by Monday and a strong rally starts unfolding on Tuesday to Wednesday by using the daily chart.

For the bears, they may still try a Head and Shoulders pattern with 957 downside target if the volume spike last Friday failed to sustain a vertical selloff.

For the bulls, a potential Running Flat has formed last Friday on daily chart after the very confusing run from late August has started.

A running flat (as opposed to the most common counter-trend lower-high lower-low flat correction) is a dream pattern for the bulls during the process of recovery rally after an 18-month selloff from 1576 high of Oct 2007 to 667 of March 2009.

Running Flats usually result in a vertical run and mostly found during rallies and much less so during sell-offs. This type of hesitant run before the decisive rally is most likely the main reason why they call recovery rally as climbing the walls of worry. It goes higher highs and higher lows. But then a very precise technical pattern has to be satisfied which Friday has provided and only if we reverse Monday and a vertical rally follows.

For the bulls, the Running Flat that has formed since late August should not worry about a potential bearish HnS pattern. Bigger problem is the 1150 to 1182 area by using the daily chart.

On the weekly chart, a sustained run above 1196 will give considerable high probability of at least 1285 to 1384 run rate before SnP will require several months of correction and go for the last rally toward 1384 to 1542 range.

After that, a year or two of technical correction or a garden-variety type of recession should follow before the next multi-year rally can be sustained.

1573/6 is the triple top for SnP on the monthly chart and is the usual patern that develops after the double top of Oct 2007 resulted in a run down toward 667.

Timeline is still on or before Sept 2013 for a triple top price target after the 667 bottom.

This type of rally is among the less common occurence during recovery rallies; initial bounce off a sustained selloff usually results in a deep pullback before the next decissive rally similar to that of Oct 2002 to March 2003 for which most traders are accustomed to.

This time around, Indu, Spx, and Compq failed to provide more than 38.2% retrace from March to May rally toward July low before going for the 3rd wave using Elliott Waves price and time analysis. The subsequent rally becomes too tedious and hesitant.

But this type of pattern is among the less common type and usually requires pricise chart formations and subsequent price actions to be successful.

We will know by next week if this pattern is dead wrong or has a good chance to succeed after several weeks of price runs if a reversal happens Monday.

Friday Roundup: Commodities, Emerging Markets

In August 11, 2009, it was almost certain SPX, INDU, and COMPQ would be on the way toward lower lows that would break their last lows of March 2009. That was supposed to be the capitulation sell-off everybody who believes in a final bottom was waiting for.

But then daily chart pattern went as crazy as can be to most traders since August 25.

By Sept 11, a new chart pattern started forming very few TAs know: that of either a running triangle or a terminal triangle and the scenario kept forming up to Oct 21 almost predictably toward the 1090 level for SnP500. Maximum limit run from Oct 2 1020 low was 1108 and it proved that that limit run was not violated with SnP only able to reach 1101 before going down to last Friday

Thursday Outlook: Commodities, Global Markets

Also look at the weekly charts of $TRAN, $SOX, and $BKX:

They are being hindered by their very obvious resistances on their weekly charts.

Transports is being prevented from executing the 5-th wave rally by the weekly resistance of 4033 but has served enough time consolidation to support a rally toward the 4479 area before it will require multi-month correction.

Semi-conductors is being prevented from going further up by the obvious resistance of 338.10. $SOX next run target will be in the 350 area but can potentially run much higher for 400 to 423 extended range if has already formed a running correction.

Financials is figthing hard against the 46.52 resistance and is able to use that resistance as a pivot instead. $BKX can go 5 to 10 weeks meltup after the last 10 weeks run up and has more than enough consolidation time to support the next price rally.

In all cases; the three sectors are not bucking down against their strong weekly resistances and are challenging those resistances again and again. Like hammer blows; a few more blows and those resistances will crack and $TRAN, $BKX, and $SOX will be on their way toward the next rally on their weekly charts.

Therefore, $INDU, $SPX, and $COMPQ will be going into another several weeks of rally once their primary sectors crack thru their weekly resistances.

What's more; with developing countries' stock markets needing much needed rest and will have to consolidate for several weeks; international investors will start looking at the US equities once the US trio goes into several weeks of rally while Emerging Markets, Brazil, Russia, India, and potentially China stayed in their required corrective ranges for several weeks.

Thursday Outlook: Commodities, Global Markets

The fad these days is sell equities and buy US dollars.

But then US$ is more affected by Euro$.

Look at Euro$ weekly chart:

There is a missing v-th wave of the 5th wave of the C wave up. Euro$ will require 2 to 4 weeks of consolidation range before it ramps up again toward 1.522 weekly fibo confluence area or even goes extended run toward the 1.598 double top since the pattern from the last low for this run up for Euro$ can support a run toward double top.

That will provide relief to the US equities specially now that the GDP had been released with better than expected results and GS was able to lower investor expectations with their own report before the government's release.

Once Euro$ and US$ goes into consolidation range on the daily chart for several weeks, that will provide enough confusion on most traders and investors reliant on US equities vs. US$ inverse relationship while the GDP and potentially next week's unemployment report carry the days and weeks ahead.

Friday Outlook: Commodities, Global Markets

This anemic rally since March 9 is what is preventing retail investors to come and join the party.

There is too much skepticism in the air. Many do not believe this rally at all.

The bulls spent 29 weeks going from SnP 667 bottom (if you can call that a bottom) to 1080 high. While the bears spent less than 22 weeks to go from 1080 of Sept 2008 to 667 or March 2009.

Scoreboard is lopsided in favor of the bears; the monthly chart is still bearish and there is 65% we can still go into 3 to 5 months of capitulation selloff.

There is too much complacency among government leaders even if they acknowledge that the stock markets will need to be "propped" up in order to prevent the onset of the Great Depression II.

The daily chart is now trending for the second time since March 9; but the weekly chart is still anemic and can still support either a rally or a selloff.

What happens if we go thru another 3 to 5 months of selloff? Dissolusioned investors might shove off everything they've got and we definitely will be in Great Depression II by next year or early 2011.

What is needed is a concerted effort by the stock market leaders such as GS, JPM, MS, and the mutual funds, and perhaps even the hedge funds to support the stock markets in order to prevent the onset of GD-II.

There is a potential expanding flat that has developed on the 60 minute chart. It was not expected but it formed anyway. The volume went up during the last 2 days of selloff; but what do you expect of a C wave of an expanding flat? I have not seen any C wave without an accompanying volume spike.

The bulls can use that corrective patttern in order to support a rally toward the 1130/40 area, and possibly up to 1210. The daily chart can support a rally toward 1284 without going over-heated or over-extended. Of course, the daily chart will need a major correction after 1284 in order to be able to support further rallies.

A vertical rally above 1294 will enable the weekly chart to generate a new trend to the upside without going over-heated or over-extended (over-extended run is a vertical rally above 1558 that can result in catastropic selloff much like what happened to oil and the chinese markets last year, they over-heated and so have to pay the price with a vertical meltdown worst than what the US and European markets had suffered).

A vertical rally above 1294 will definitely reverse the bearish monthly chart and ensures at least 90% chance of additional rallies with only 10% or less chance of a major selloff or meltdown thus preventing GD-II.

The weekly chart can have a normal rally toward 1394 before it will require a major correction that can last 8 to 18 months.

A major correction of that duration can create a mini-bear market or a mini-recession by late next year or early 2011. A welcome sign for most seasoned traders and investors indicating that the stock markets and perhaps the economy had already returned to normal and the usual rallies and garden-variety recessions will again be the staple stuff for several years or decades ahead.

We will see in the next week or two whether this anemic "bear" rally will continue and thus risk a 65% probability of a potential capitulation selloff that can usher GD-II.

Or we go into a vertical rally toward at least 1294 to 1394 without the weekly chart going over-extended and thus prevent GD-II by more than 90% probability.

Friday Wrap: This Market's Running on Empty

The monthly charts are more telling for longer term outlook.

As far as the major indexes are concerned, the run up from March 2009 is a tad slower than the run down during the 6 months prior to March 9. Except for the Tech Sector of course which performed admirably during the initial phase of this rally.

Count the number of weeks of the last leg down from January to March (I counted 9 weeks of sustained selloffs with a pullback). The succeeding 9 weeks after March 9 was not able to surmount the preceding 9 weeks in time. That is a poor recovery performance and not indicative of strenght that usually is needed in order to restore faith and confidence among traders and investors - except for the tech sector, which garnered lots of praise and confidence among traders and investors up to now.

That is the bad part of the equation that persisted up to the 25th week of this rally.

In most cases -- a successful recovery against such massive meltdown requires a rally that should perform faster than the preceding event. Despite most everybody getting a case of vertigo; the "recovery" rally by INDU, SPX, and RUT were simply a tad slower or simply too slow to be able to sow the seeds of confidence. It can still be called a bear rally rather than a recovery rally.

The existence of too much doubts among many market participants as to the strenght and longevity of this initial rally makes it vulnerable to a massive pullback or a capitulation sell-off.

There are bigger hurdles ahead on the monthly charts, specially the Sept and Oct 2008 panic selling that will have to be addressed either by a show of force or by trepidation among bulls OR nothing at all with a grim September coming into the fast lane.

It is rather looking like a DO or DIE situation from here on.

Still, the bulls have a small edge against the bears with the "surprise" rally of the last two weeks. If the remaining traders and investors grab the bull by the horns in September, we might end up breaking the major Spx 1055 resistance in 2 to 3 weeks time. And most probably be in the vicinity of 1070 to 1127 by November of this year.

After that another major correction similar to that of June to July will be needed to sustain the rally -- assuming the rally from March lows did not produce a running correction 2nd wave on the weekly charts in which case we might end up well above 1145 before the end of the year for a 3rd wave rally.

I am long since Feb/March; And I will be cheerleading the bulls on their efforts. That does'nt mean not expecting what the bears can possibly do. They can still do a lot of damage in a very short period of time until faith and confidence among traders, investors, and the general public had been restored.

1145 on the monthly chart for SnP500 is the line in the sand; significantly break that within this year and more than 80% probability this rally can be sustained in the years ahead.

Tuesday Outlook: Commodities, Global Markets

Most traders are now short the markets using either the daily 200 ma indicators or weekly momentum divergence indictors.

These are conventional TA.

Since most of them are already on the hook, anything that can upset their short trades will squeeze them hard.

One "unconventional" method of going against the crowd is by using a fast MACD indicator. I am using the 2-10 Oscillator

The daily fast MACD is now hitting extreme level of -26 BUT the price of SnP at today's low of 888.86 is still higher than the last low of 879 last May 15 when the MACD was at -17.

It is called a bullish divergence.

If it works, it works against the majority of traders who are using the weekly momentum divergence short indicators and the daily 200ma breakdown panic sellers. It works against the majority and can easily cause a major short squeeze and a vertical rally once SnP goes above the daily 200ma again then followed by Dow Jones going above it's own daily 200ma a few days later. Then followed by those who will be trying to short Dow Jones and SnP potential Head and Shoulders pattern on the daily and weekly charts, then followed by those who entered shorting the markets using the weekly divergence short signal if and when SnP goes above June 11 high of 956.

Major fibonacci confluence resistance on the weekly and monthly chart is at 962.

If you are fast and nimble, you can try going against the crowd using the daily fast MACD bullish divergence indicator. It is not a high probability trade but when it works it can cause massive short squeeze in a low-volume trading environment such as we have these past several weeks. Low volume usually means consolidation range and since volume to the downside has not gone up yet - meaning no distribution yet; then there is still a good chance that volume can ramp up on a rally instead of on a sell-off.

Daily and weekly VIX is still in a downtrend, so it cannot be used by the bears to trend trade to the downside.

There are so many reasons the markets should go down both technical and fundamental.

But the end of quarter is a major problem for shorts since the mutual funds' window dressing season is upon us. So be very careful with your short positions.

Tuesday Outlook: Commodities, Global Markets

The bigger question is when the trading volume does come back or goes higher - where is the price going into, UP or Down?

Target for SnP is still 982 before the next 6 months of stair-step type of sell-off should follow into the Nov/Dec 2009 time frame. Q1-2009 if things turned from worse to worst.

A tall call considering the massive confusion that is prevalent at this stage; but this is how this type of pattern (a C-wave) usually resolves. See my previous posts on how a C-wave pattern usually resolves. There are many other ways it can be resolved. I'm betting on the highest probability rather than the 2nd or 3rd higher probabilities.

C-wave is not a complex pattern to a trained eye, there are far more complex patterns that can happen (for example, the Tech Meltdown of 2000 to 2002 is a complex A-wave pattern, the bear rally from 2002 to 2007 is a complex B-wave pattern. That is how an A-B-C pattern forms; from complex to (more) complex to simple. Likewise, look at the Australian dollar of early 2004 to early 2006 on the monthly chart. It is an A-B-C with a simple A-wave down, a complex B-wave up, and an extremely complex C-wave down pattern before the rally was able to start in March 2006.

A-B-C patterns can follow the sequence of complex to more complex to simple. Then there is that pattern that goes from simple to complex to more complex such as the A$. It happens much less often than the other patterns.

The most common A-B-C pattern is a simple A-wave to a very complex B-wave then a simple C-wave. Dow Jones and SnP did not follow the most common pattern but rather the second most common pattern.

Dow Jones, SnP and Compq are still following the usual pattern by which a simple C-wave resolves itself. The C-wave pattern has revealed itself since Oct 2008 and has not deviated from all the expected ensuing reactive bear rallies and fake sell-offs that follow the sustained panic sell-off of Sept-Oct 2008.

Massive confusions usually follow the series of bear rallies and fake sell-offs before the final capitulation sell-off cappes the end of the C-wave. We are now at the confusion stage where hope starts to re-assert itself despite grim fundamentals.

Taiwan went into over-extended rally. A very risky situation, the ensuing correction might end up as a punitive sell-off if their expectations of trade easing with China turned out to be nothing but false speculation.

Likewise, the "green shoots" speculation in the US can easily produce a spike rally to SnP 982 and above but the sell-off after the rally can become punitive rather than corrective if things turned out too far away from what was expected. So things can still go awry.

We will see - and we will see how this thing will pan out into the near future.

Tuesday Outlook: Commodities, Global Markets

XLI is the least likely to produce lower lows on the weekly charts if we go down at this stage. They need more consolidation range before the next run down.

Risky to short IYT and expecting for a lower low. Transports more likely has just completed a 1-2-3-4-5 down on the weekly. It remains to be seen whether this is a C-wave that will lead to higher highs, or an A-wave/1st-wave.that will lead to lower lows. Price structure on the monthly chart does not support any particular pattern. If the latter, it will require a lot of consolidation time before going down to lower lows.

The rest of the bottom dwellers will most likely make a pullback, go lower low or double bottom in some cases - IF we go down at this stage. Momentum to the downside is on their side.

There is still an equal risk of higher highs for Dow Jones, SnP, and Compq that will scare the bejesus out of shorts - if the indeces are defining a triangle at the top of the daily chart. The low daily volumes for the last few weeks indicate the presence of a triangle, some are calling it a wedge. Whether the triangle, not necessarily the wedge, is still in progress or has already completed is extremely hard to determine. A spike rally or a spike sell-off will confirm the presence of the triangle. No spike = no triangle.

Most bulls are just waiting for either a pullback or a selloff to buy some more for long-term investment specially those who were left behind by this unexpectedly strong rally. Many were expecting a weak bear rally.

We are now at the most confusing stage of this 19th-month "economic crisis of the century".

So we don't know which has a higher probability and the daily chart is confirming the ongoing confusion.
Another rally? A pullback or a selloff? - Or a triangle from hell if the ongoing confusion goes for weeks and months.

Good luck.

Friday Outlook: Commodities, Global Markets

Gold is in the hope mode. Hope it does'nt go down. Hope it goes up further. One way to improve analysis of the potential continuation inverted Head and Shoulders on the weekly chart is to count the number of bars on the left and right shoulders. They are basically equal in price targets but not in time consolidation. Target for gold if the C-invHnS pattern succeeds is $128 with 80% probability of $106 and progressively lower probability as it approaches the nominal target of $128 (forgot how low, 20-30% probability range perhaps). That is, if the continuation invHnS works. They have much lower chance than that of a normal invHnS that tends to form at the bottom of a sell-off. One of the more riskier patterns. I'll bet on the invHnS at the bottom of an extended sell-off anytime rather than that of a C-invHnS that sometimes forms at the top of a rally.

Copper has more than 90% probability of making higher high on the weekly chart. The weekly chart has already produced enough momentum to sustain another rally but after an extended period of consolidation that should last more than 7 weeks but no more than 21 weeks. The daily may or may not provide another minor rally before the weekly consolidation starts kicking in. The rally from midFeb to midApr is already extended so there is no need to chase the rally on the daily chart, consolidation on the weekly chart may kick in at any time if not already doing so.

Most emerging markets are sporting flat patterns (or bear flags as most pattern traders call them) on the weekly charts and are expected to go into sell-off mode sooner rather than later to lower lows.

China's Shanghai and Shenzhen indeces are at the last stages of their 6-month rally thus a prolonged correction is expected to happen sooner rather than later. It can be a shallow or a deep pullback or in-between with no definitive percentage of probability on whichever type of pullback is more likely to happen - until after the first run-down has already happened.

Unfortunately, there is no ETF that tracks China's indeces but rather FXI, PGJ and HAO are tracking the Hongkong (China) index rather than the Peoples Republic of China or Mainland China since they cannot invest directly into Mainland China. Shanghai and Shenzhen indeces are the current buys of the decade if not of the century once they commence with 6 to 12 months of corrective process or pullback. FXI, PGJ, and HAO (and EWH of Hongkong) are more likely to produce lower lows as Mainland China corrects to higher low with more than 65% probability. I would'nt bet on Shanghai and Szensen going lower low at this stage. More likely they are going to end up with an L or hockey-type bottom we call a terminal triangle since they are mostly trapped between the bullish Mainland China and the bearish US. Terminal triangle bottom is the usual result of massive indecision among market participants.

Taiwan (EWT) may be the exemption to the developing countries ETFs. The rally of $TWI (the index itself) from Mar to Apr is already extended thus having more than 90% chance of making another rally after 5 to 10 weeks of consolidation. It is going to be a hard fight since all the other indeces are high probability to go down to lower lows including Europe and the United States (US is the most unpredictable of the bunch with patterns on the weekly and monthly charts of Dow Jones and SnP very hard to decipher - so be very careful). How Taiwan is going to accomplish that is beyond me. Perhaps pare down the 90+% probability to much lower percentage. Still I would not bet Taiwan going down lower. They are mostly anti-China and less likely to be affected when Shanghai and Szensen indeces start correcting in the months ahead.

The time will come for the US's Dow Jones, SnP, and Compq, but no definitive analysis at this stage. Same with Europe's DAX and CAC. Hopefully by the end of the year when the final bottom is expected to happen in the Western World (By that time Shanghai and Shenzhen should be reaching the bottom of their pullbacks to higher low). Then evaluate the ensuing rally and buy some more on a shallow pullback in late 2010 if the rally proved to be impulsive rather than corrective. Technically, a shallow pullback with the expanding flat Dow Jones is finalizing has the highest probability. Psychologically, Shanghai and Shenzhen should be running more than 100% and possibly 200% price appreciation from their Oct. 2008 low by the late 2010. US and Europe will have lots of catching up to do in the years ahead to that of China's.

My 2cents worth, if you will.

And good luck to all. We all need a little luck after 18 months of sustained sell-off in the US and Europe.

Friday Outlook: Commodities, Emerging Markets

US dollar spent too little time correcting before the attempted rally. More likely it is going to pay for this mistake by triangulating before the next rally can commence.

Friday Outlook: Commodities, Emerging Markets

Many of your beaten down charts have potential momentum divergence indicators waiting for the buy signals to trigger.

Time to start covering some short positions.

Momentum indicators on the weekly and monthly charts are still very strong. It is going to take a lot of back and forth bear rallies and sell-offs for most beaten down sectors to be able to slowly weaken the downside momentum.

Time to start confusing the investors again until they finally drop out of the short-term timeframe game and let the traders do their job of finding and setting the final bottom. Their participation will be needed when the dust finally settled.