Market Clues

The stock market also showed signs of life, although the Dow itself was still stuck in the trading range it has been in all year. The significant action was in our leading sectors. Here are two charts, one of the broad market and one of the NASDAQ, both of which indicate continuing strength:

The Dow did hold its accelerating up polytrendline on Wednesday and we need to see that index start to accelerate as well:

Light trading volumes over the next week are expected as traders head off to the popular vacation spots on the long Fourth of July holiday.

MyClues Home Page Link

posted by Bob Carver  # 6:41 PM

Money Flow continues on an upward trek (see our Accumulation-Distribution Charts for sector charts), sentiment was relatively subdued on a Turnaround Tuesday and the broad market continues to lead the way higher. In terms of ETFs, QQQ appears to be in a very strong position to rally:

(QQQ is a tracking stock for the NASDAQ-100 Index and tracks at 1/40th the value of the index.)

The Federal Reserve is poised to hike overnight funds interest rates to 1.25% from their current 1.00%. The move has been well-telegraphed by open market operations. A week ago, they were lending money in Repurchase Agreements for 1.01%. On Tuesday morning, their lowest rate was 1.21%. Thus we have a 25% increase in short term rates, which is still below the inflation rate, constituting a negative real interest rate, and which is still stimulative for the economy. The official announcement will come at 2:15 pm EDT Wednesday, but what the market will be watching for is whether future hikes will done in a "measured" way — meaning that real rates will remain negative for some time to come. If the market gets a whiff of a more accelerated program, it could be bad news for stocks, bonds and gold. Considering that the Fed understands this, we don't expect that to happen. Since the market has been worried about this point, reassurance from the official Fed announcement is likely to release pent-up buying demand in the stock market.

MyClues Home Page Link

posted by Bob Carver  # 5:50 PM

This is all very preliminary, but constitutes a good reason to wait on gold stocks to put in good bottoms. This also suggests US Dollar strength for a couple of months is likely.

The blue chips opened sharply higher Monday morning on news — the Iraq handover was done two days ahead of time — and, like many news-driven moves in the market, didn't last. The money flow lines shot higher on the opening, but so did the call buying frenzy in both the OEX pit and the QQQs. And, of course, we're in the end of month period of time which typically is weak. So, the market sold off in the afternoon:

A lot depends on whether the market can put in a good low over the next couple of days. If so, it could be off to the races on the upside. Monday's selloff helps turn heads bearish and that's all to the good if the market is going to rally later.

MyClues Home Page Link

posted by Bob Carver  # 6:27 PM

The government reported Friday morning that first quarter growth slowed to 3.9% from the 4.1% rate recorded in the fourth quarter of 2003. At the same time, inflation ticked up to 2.0%. The statistics cast a pall over the blue chip sector, but boosted the broad market, resulting in the spread between the Value Line and the Dow Industrials jumping by over $1600. In fact, the upper channel boundary has now been punctured, confirming that another leg up in the rally has begun. While the blue chips are lagging in this rally — just as they did throughout 2003 — the rise in our leading sectors (NASDAQ-100, Semiconductors, MidCaps and SmallCaps) is very bullish for the entire stock market.

Confirming the continuation of the low interest rate environment, the Utility sector indices (for example, the Dow Jones Utilities) also are showing excellent accumulation statistics:

This impressive rise in the Utility stocks (both price and in their aggregate accumulation curve) suggests that the Fed's hands are tied for now in raising interest rates very much. With the economy cooling without any Fed rate hike action whatsoever to date — just as we told you due to the cessation of artificial stimulation from the government — the Fed will have to be very careful in order to keep the economy's pump primed. Although the Fed might raise the overnight rate in baby steps a couple of times, no significant rise is going to be feasible for Greenspan and Co., who now have to worry more about the threat of deflation than inflation once again. As if to underscore the point, a new measure of inflation which measures prices of real goods in everyday use (as opposed to the government's wildly unrealistic estimates of what goods should theoretically cost) is demonstrating that the traditional Consumer Price Index has actually overstated inflation levels by up to ½% per year, something Fed Chairman Greenspan has claimed was the case for several years. Now that the Fed's view that inflation is not now, nor is likely to be, a problem has been confirmed, there's even more reason to believe that they will keep interest rates relatively low for the foreseeable future.

In addition to the Utilities, another stock group which should benefit from the Fed's hands being tied are the gold mining stocks, which were beaten up badly by recent fears of rate hikes. But, we need to watch for a key ingredient in the puzzle to confirm the turn, the US Dollar. A falling Dollar is something that will confirm a continuation of low interest rates, higher gold prices and a higher stock market. We also are waiting for the smart money to buy back into the gold stocks, something they are not doing right now.

The smart money has been selling stocks for a long time now as our Accumulation-Distribution Charts at http://www.marketclues.net/img/d2/ so amply demonstrate. Most stock sectors are oversold, some extremely oversold, and thus ready for an oversold bounce rally. But, this rise in the stock market is likely to be very, very selective. And, it's probably going to be the last rise for some time to come. That's because the smart money is likely, having already sold their "inventory" of stocks to the public, to be using this rally to sell stocks short. The next leg down in this long term bear market may be a few months away, but it's heading our way before too much longer. And, the smart money will be looking to buy back their short sales when the public has had enough pain and is selling out near the bottom, just as they always do.

MyClues Home Page Link

posted by Bob Carver  # 5:12 PM

Although the end of month period here must be watched closely:

As is clear from the charts above, the retracement saw very light negative money flow after a couple of days of strong rally.

Gold Stocks: The recent strength in gold stocks has been a reaction against the US Dollar Index's decline, but if support holds in the dollar, that strength could turn to weakness in short order:

MyClues Home Page Link

posted by Bob Carver  # 7:01 PM

Our expectation is that the S&P 500 Index will reach that 1193 target we discussed in the last Weekend Update. The fact that the index closed above the upper Bollinger Band indicates strength. Pullbacks to the middle band are buying opportunities (the 20-day moving average of the close is currently 1128 — Source: Exponential Moving Averages Table). The index closed at 1144.79.

The broad market is leading the way as the market rebounds from a very oversold condition according to our Accumulation-Distribution Studies. Especially oversold are the Small Caps:

A run from the bottom of the bands to the top is likely to carry prices considerably higher as this last leg up in the bear market rally kicks into high gear.

Remember, if you're trading Exchange-Traded Funds — essentially mutual funds which trade like narrow, sector-based mutual funds — be sure to check out our 20-Day and 50-Day Heat Maps which show the leading ETFs on a daily basis on the main website.

MyClues Home Page Link

posted by Bob Carver  # 7:37 PM

It looks likely that the turn date near the end of the month could be the final wave down in the contracting triangle. That triangle is likely to be wave b of an a-b-c leg up. Given the positive accumulation we're seeing in the blue chips, a Summer Rally could be just around the corner.

The QQQ traders turned bullish on the dip Tuesday morning and that turned out to be a good leading indicator for the rally that got started. More often than not, the QQQ sentiment numbers are good for a short term move, while the OEX sentiment numbers tend to contrarian in nature. Why this is isn't exactly clear, but it's something we've observed on many occasions.

The Max Pain figure for the QQQs is still sitting at 36, right in the middle of the trading range, so the market is in a state of almost perfect balance right now. This is truly a market that needs a catalyst to move it out of the range.

MyClues Home Page Link

posted by Bob Carver  # 6:05 PM

But, Monday's sharp selloff generated just a bit of fear in those optioneers. Our dollar-weighted figures for QQQ (proxy shares for the NASDAQ-100 Index trading at 1/40th the value of that index) showed puts were more than twice as popular as calls, causing the Maximum Pain price for July to swing down slightly to 36. There's still a lot of calls held above the market, though, and that is a source of resistance to any rally that gets started now. Thus, a steeper selloff, preferably all the way into that significant month-end turning point, would be ideal.

From the wave pattern, however, it appears possible that the market could put in a low Wednesday morning and rally sharply higher. If Monday's selloff was wave c down in a corrective a-b-c pattern, we could see a powerful rally get started then. It's definitely something to watch out for if you're short the market. Or, if you're looking to enter a position long the market. We'll be looking for signs of a trading bottom developing in Tuesday's action. One key sign would be a complete shift to put buying by OEX speculators. 2× dollar volume in puts compared to calls typically will mark a trading low within a day or two.

MyClues Home Page Link

posted by Bob Carver  # 9:01 PM

The S&P 500 Index (SPX) has been struggling all year, but appears to be on course now for a final leg up in this bear market rally. The Time Ratio High due in September corresponds to long term resistance at 1193, or about 5% above Friday's closing level.

Investors should use this coming rally as a selling opportunity to take profits and dispose of stocks. The market is going to be in big trouble at the next intermediate high and could drop below the 2002 low before the next decline finishes, so there's no reason to be exposed to risky stocks during the coming decline. It's too early to get short, however, so while we think holding broad market stocks here is the right posture, we are not long term bullish on the US market as a whole. There are much better places to invest longer term, such as gold stocks and the Australian stock market:

Gold stocks broke above one of their resistance polytrendlines Friday. That was a mixed blessing for the long term bull market, however. It was good news in that it gave gold stock holders some relief from recent downward pressure. It was bad news in that it means we weren't able to wash out the stocks completely and will probably have to suffer through a long trading range bottoming pattern before we get a long term bottom and the beginning of a sustainable uptrend. Still, we think accumulating the gold mining shares on price weakness for the long term is a good idea, with the idea of about a 10% portfolio allocation about right for now. Later on, we'll be looking to add funds to the gold sector, but after we recognize that the long term bottom is behind us. There's no need to rush in because further price weakness is very likely ahead due to a rebounding US Dollar.

Speaking of the US Dollar, in fact, Friday's plunge in the Dollar Index was primarily responsible for the breakout action in the XAU Gold Mining Index. DX probably has further upside potential, though:

Short Term

A significant turning point occurs at the end of June. If the market falls into that time period, it would represent a good buying opportunity for a rise into September. However, a rally into late June would be bearish since it would unbalance the market and lead to a sharp fall thereafter due to excessive bullishness amongst speculators. It might even represent the final peak in the dominant 4-year time cycle, which is due to peak this year and send the market sprawling into a bottom due in 2006.

Traders should find this week's action more pleasing than last week, especially when the contracting triangle breaks out one way or the other. Nominally, the triangle should break to the upside, then see a collapse back toward the mid-May lows to put in a late June trading low. That would be the most bullish outcome.

MyClues Home Page Link

posted by Bob Carver  # 6:35 PM

Looking over the array of Accumulation-Distribution charts, it's hard to be bullish as it's clear that this 6-month trading range has turned into a vehicle for the insiders to unload their shares at incredibly expensive prices to the public. The interesting thing will be just how spectacular a rally they engineer to draw the last of the sideline money into the market. That's typically the way these tops get finished. The last of the shares are sold into that rally and the insiders get comfortably short as soon as they've disposed of their "inventory" of shares.

Even the Dow Industrials are beginning to succumb to the selling pressure. They had been holding up very well with positive accumulation. Not so now. As you can see, the selling has been picking up steam:

What's Next? Well, we'll get into more detail on this weekend's update, but the narrow rangebound trading this week should lead to a couple of head fakes next week, first up (short and sweet) and then down (longer and deeper) as the insiders gear up for one last rally — if they can. Late June has a tendency to be a good place to buy on a seasonal basis as the market gears up for the Summer Rally going into the Fourth of July. But, we're talking short term trading here, not anything longer term.

MyClues Home Page Link

posted by Bob Carver  # 9:28 PM

On Wednesday, gold stocks rallied while the US Dollar Index gained, certainly not a normal relationship — and very bullish for gold stocks.

Normally, we will see the gold stocks bottom before the metal itself. According to our XAU chart, the stocks could bottom as early as next week, although we think a July bottom is a bit more likely:

Nemont Mining is nearing a long term support line:

Newmont is a good proxy for the whole sector. Next week looks like it could be very interesting. If we get a continuing rally into next week, it looks like it will just delay the ultimate bottom, so it really would be better for gold stocks to simply wash out next week and put in a tradable low.

As far as the rest of the market, it's trapped between a rock and a hard place. Now, whether the Federal Reserve is the rock or the hard place isn't for us to decide. Sentiment is indicating that the bears are in the process of capitulating and that's definitely a bearish indicator. The QQQ option traders who had been so bearish before and were buying puts are now buying calls. That suggests we should be topping out in NASDAQ soon. The OEX numbers are just leaning to the bullish case and aren't at an outright sell level — yet. This week is playing out according to the script where option short sellers pocket time premium from both put and call buyers and the market's volatility goes gradually toward zero. It's a good living anyway for some.

Will we see a final fling to the upside? It still looks like it will happen and probably starting near the end of the month and going into July:

MyClues Home Page Link

posted by Bob Carver  # 9:33 PM

The Time Ratio turning point due Tuesday thus appears to have been a low:

The market is likely to continue working sideways near term, remaining within close proximity of that Maximum Pain price ($36-37 for QQQ, 545 for OEX). QQQ closed at 36.79 and OEX at 552.69. A significant sentiment change, however, appeared in our QQQ Dollar-Weighted trade figures, however: QQQ traders bought $1.63 in calls for every dollar they bought in puts Tuesday, which is a big swing from their recent steadfast bearishness. Coincidentally, the OEX traders ended with the same ratio of calls to puts as their QQQ brethren and that should send a shiver of fear down the spine of the bulls. Having too many players on the same side of the boat probably means the boat will get swamped. But, as we've said in recent days, there's a sea of puts underneath the market and we'd suggest that even if the boat takes on water, it's only wading depth here!

The FTSE-100's initial test of those rising support lines was successful, but that doesn't mean we're out of the woods. The Elliott Wave pattern is extremely bearish and any breakdown below those support lines would sound a strong warning for all stock investors in coming days. The turn to the bullish sentiment case on the part of the QQQ traders just might have been the last act of the bears throwing in the towel. In other words, giving up just before the market starts moving their way.

A quick glance at our Accumulation-Distribution Charts for sectors shows that despite the rally, the market is undergoing net selling pressure in almost every sector, which is not bullish (but, not immediately bearish since such selling into rallies could go on for months). The direct link to that chart page is to the left if you're reading this on marketclues.blogspot.com and http://www.marketclues.net/img/d2/ for visitors. Subscribers will find a more complete page by clicking on the Daily Accumulation-Distribution Charts link (both here or on the website).

Bottom Line: It's summertime on Wall Street and we've entered the doldrums. The big money is on vacation in the mountains and at the beaches, leaving their lieutenants in charge of herding the market sideways until they get back in September. The only way we're going to see a big move is if there's some surprising news out of left field. Yes, a summer rally just might get started, but we wouldn't count on it just yet.

The gold stocks still have more work to do on the downside to build a base to end this correction in a long term bull market. Tuesday's bounce does not constitute a turnaround in that sector. However, some of the stronger individual gold mining stocks are beginning to show good relative strength and that's something we need to see for an eventual turn to the upside.

The bond market reacted as if they expected far more inflation to show up in the CPI report. That turned the shorts into buyers as they covered their bearish positions and sent prices in the bond market soaring:

The bond market was expected to put in a bottom right now as you can see from our chart, but that doesn't mean we've started another big leg up. It does suggest, though, that things will gradually turn up for bonds but that tests of the recent lows are still very possible (even likely). So, we wouldn't jump into the bond market just yet for longer term positions.

MyClues Home Page Link

posted by Bob Carver  # 9:55 PM

The NASDAQ Composite chart suggests we could get a Tuesday Turnaround or see the decline accelerate downward:

But, given the proximity of the market to "Maximum Pain", we'd suggest that the most likely course is for the market to stall in the current price area and move essentially sideways, rather than bouncing right back up or plunging through support. Of course, that's unless we have some external and unknowable catalyst to move the market off "dead center".

The FTSE-100 in London is also hovering just above its support trendlines, so we won't have long to wait to see which direction the wind is blowing.

The Gold Stocks continue to plunge lower toward a great Buying Opportunity:

The US Dollar Index pulled back on the trade report out Monday morning. This is a minor pullback in a major rally in the dollar, which will keep the pressure on dollar-denominated markets.

MyClues Home Page Link

posted by Bob Carver  # 7:24 PM

For a limited time, we are making these extremely valuable measures available to visitors to the site. If you're reading this on http://marketclues.blogspot.com/, look to the left side for a link labeled, "Daily Sector Accumulation-Distribution Charts". Subscribers will find the permanent link on the main subscriber page listed in the daily charts section with the same heading ("Daily Sector Accumulation-Distribution Charts").

There are a handful of sectors which still show positive accumulation patterns. But, the vast majority are either neutral or heading lower. The Small Caps are strikingly bearish:

The accumulation-distribution curve looks like it has completely fallen off of a cliff! We have to conclude that the small cap stocks, which outperformed the blue chip sectors for years, are well-entrenched in a bear market despite prices hanging up near the old highs. Our expectation is that prices will eventually follow the accumulation-distribution curve's plunge.

On the other side of the coin, here's a sector which looks pretty good:

Even there, the sector is nearing limits — notice that the accumulation-distribution curve is faltering even as the price curve makes higher highs? That's a case of bearish divergence. The drug sector indices represent a very defensive sector and appear to show a flight to safety underway in the market:

The bottom line here is that the foundations of this stock market are weakening. That doesn't mean the building is going to collapse right now. But, if unchecked, it could lead to some serious problems for price structure down the road.

MyClues Home Page Link

posted by Bob Carver  # 5:08 PM

One of the outstanding indicators we track is the spread between the Value Line, representing the broad market, and the Dow Industrials, representing the blue chip sector. When that spread is rising, it means most stocks are advancing and is very bullish for the underlying trend. When the spread is falling, though, it is very bearish and is historically associated with bear markets. Over the past few years, the spread has been a great indicator. Being invested in the stock market during periods when the spread is trending higher has been the right stance. And, being out of the market (or short) when the spread is trending lower has also been the right stance. The chart below shows a trend channel we have constructed using prices going back several years in the spread. According to the mathematical formula we use to construct polytrendlines (the channel support and resistance lines are polytrendlines), the support trendline was due to peak and roll over to the downside in April — and that's exactly what happened. In fact, the spread actually fell through the support line, which indicates that, although the uptrend was expected to end and the market head lower, the reality of the current situation is even more bearish than expected. Thus, the last gasp rallies we've been seeing are exactly that: last opportunities for the smart money to distribute shares near the top. And, it appears that the rebound in the spread of late has run into stiff resistance after retracing about 62% of the prior decline, a natural resistance point. This could mean that a sharp decline in the spread is directly ahead:

This does not necessarily mean the blue chips are going to roll over to the downside. But, it certainly does not bode well for bullish rewards in the stock market from here. Rallies in the blue chips are going to be great short selling opportunities in coming months. And, the weakness we're seeing in the Value Line is also reflecting the picture we're seeing from our Accumulation-Distribution chart of the entire universe of stocks we generate each evening: that chart is now showing the accumulation-distribution line heading lower into negative territory, which just confirms the turn to the bearish case despite recent, but very brief, breakouts of the various resistance trendlines in the market.

US markets will be closed Friday as we remember President Ronald Reagan. We will have our regular weekend update on Saturday.

MyClues Home Page Link

posted by Bob Carver  # 10:04 PM

The NASDAQ-100 got hit hard just as expected. We had seen great weakness in our "lead dogs" on Tuesday and Wednesday showed what kind of aftermath to expect when that happens. Remember, that 36-37 price area of the QQQ (corresponds to 1440-1480 price area of NDX) is going to be a pivot price for the NASDAQ:

This certainly looks like it's going to be a contracting triangle, doesn't it? If that's correct, we should get a nice wave e decline into late this month, then a very strong rally into August, more likely September.

The action in the US Dollar Index is probably a wave c advance, which means this is the last leg up in this upward correction. Once this rally ends, we will be ending wave 2 up and beginning a very powerful wave 3 decline. That will be extremely bullish for gold stocks and that's why we think this last leg down in the gold stocks is setting up the buy of the century in the gold stocks. Of course, by the time we get there, most will think it's crazy to even consider gold stocks — which will confirm the buy!

If you haven't signed up for Free Week that Elliott Wave International has on now, be sure to do so at http://www.elliottwave.com/a.asp?url=freeweek&cn=mktclue

MyClues Home Page Link

posted by Bob Carver  # 5:24 PM

The Dow Industrials were relatively strong on Tuesday as they followed through on strength seen Monday. Our "lead dogs" — NASDAQ-100, Semiconductors, MidCaps, SmallCaps and Value Line — lagged, suggesting this market surge came too far, too fast. Most likely, the rally has been fueled on mostly short covering so far.

It's not surprising that the venerable Dow average has been leading the charge. After all, our Accumulation-Distribution Study of the DJ has been unquestionably pointing the way higher, diverging bullishly for the past few weeks:

The US Dollar Index has been bottoming here and a rising dollar is not bullish for stocks. The stock market is likely to consolidate into month-end from here:

Gold Stocks Being Hammered by the Dollar

MyClues Home Page Link

posted by Bob Carver  # 5:10 PM

That may not be the case for the tech sector, however. Near term, the NASDAQ-100 Index and its companion share QQQ moved smartly up to close right on an overhead resistance line. Any follow-thru from this level would be bullish, but we suspect that Monday's closing price will be retested in the days and weeks to come. From the perspective of option sentiment, put and call open interest in the QQQs is in balance at the 37 strike price — and that's where QQQ closed Monday. This price is now an anchor for the market, drawing it back when it tries to rally and pulling it up when it dips. We would not be at all surprised to see the market make no net progress over the next few weeks as it gyrates above and below its current level.

MyClues Home Page Link

posted by Bob Carver  # 5:10 PM

The Labor Dept itself says that, "The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend." Hopefully, we are not currently at a point in time when the trend is suddenly changing or at an economic turning point. As we saw last year, even the long term 39-Month cycle in the stock market can suddenly disappear without warning. With over 78% of the headline new jobs figure due to a "projection" rather than real jobs data, it's not a confidence-builder to see the politicians and their media mouthpieces, not to mention the markets, taking the numbers as real and solid without even mentioning the inherent inaccuracies in the methods used to produce those numbers. To their credit, the Labor Dept does say on their website that, "BLS will continue researching alternative model-based techniques for the net birth/death component; it is likely to remain as the most problematic part of the estimation process."

After the number was released at 7:30 CDT Friday morning, stock index futures, which had been rising ahead of the numbers, continuing moving up. Peaking in early afternoon, prices tumbled into the closing bell, giving back about half of their gains for the day. It appears that the market, despite good news, is still being influenced by that down phase of the short term cycle we've been illustrating here. Since the market didn't give back all of its gains, though, it appears that the underlying trend is still up and buying dips is the right stance to take if you're an overnight trader. Friday was an excellent day for daytraders to sell the rally short. Daytraders tend to make money playing the countertrend moves due to the fact that, oftentimes, the early, exaggerated moves are retraced substantially.

The Relative Strength Table showed mostly green all day Friday as the broad market VLE, SOX (Semiconductors), NASDAQ-100 (NDX) and Small Cap (S&P 600) Indices outperformed the blue chips. Only the S&P 400 MidCap Index showed small losses in the relative strength category (note: this is not the RSI, which only compares one index to itself — relative strength compares one index to another index and is a far more valuable measure of the market than the RSI). When these "lead dog" indices are outperforming the blue chip Dow Jones Industrials Average and S&P 500 Index, the market is considered truly "strong".

Sentiment remains mixed. Non-dollar adjusted option ratios suggest a high fear level, but our dollar-weighted values show a more moderate mix of fear and greed. The OEX number Friday indicated that the bulls were relatively confident with a 1.49 ratio of call dollars to put dollars. However, QQQ traders, who are generally right on the very short term direction of the NASDAQ-100, were extremely bearish with a ratio of only 0.44. Overall, sentiment is mixed and that suggests the market is stuck in a trading range until some catalyst comes along to create the conditions for a breakout one way or the other.

Several have emailed that the Fed is preparing for some kind of financial meltdown by pumping up the M3 money supply. First of all, the Fed may control short term measures of money, but has little control of M3. Secondly, the M3 rate of growth is simply regressing to the mean — returning to the growth trend it was on before the 2003 period of sideways-to-down movement that raised deflationary fears last year. Clearly, the long term chart of M3 from the FRED II site doesn't suggest anything out of the ordinary:

The growth in M3 may simply represent a reliquification of the system as hedgers cash in their chips due to rising interest rates. As you can see from the bond chart, there has been a great deal of selling pressure in that market:

That "carry trade" allowed borrowing at rock-bottom rates to finance buying of longer term (and higher yielding) securities, thus locking in a profit due to the difference in rates — as long as rates were heading lower, that is. With rates moving rapidly higher, those carry trades are losing money and thus have generated almost panic selling in the bond market over the past few weeks. This unwinding could have even been the fundamental reason why gold and gold stocks have been tumbling in the face of rising commodity prices, including oil. If that is the case, we should have an absolutely fabulous buying opportunity coming up soon in the gold stocks.

MyClues Home Page Link

posted by Bob Carver  # 7:48 PM

The two trendlines in the broad market Value Line chart gave us an excellent roadmap of the market at the beginning of the recent rally. And, they're still having an influence on the market:

As you can see, the steeply-angled trendline (labeled T2) provided some temporary support for the market at the end of May, but after two breaks and a retest from underneath, finally failed to pull the market higher. The very short term trendline which developed from the 24th to the 27th (T3) is also very weak and the market has repeatedly slipped below and above it. However, the market is tracking that trendline ("orbiting" as we like to call it), so it is still exerting some influence over the market. If the market continues orbiting that short term line, it will intersect the bottom support line (T1). Since that trendline was very strong back in May when it kept the market bottled up for weeks, we know that it should have a strong influence. Now that the market is above it, it's a support line. So, we can reasonably expect that a test of that trendline should reverse this downtrend and send the market back up.

When the broad market can rally, it can pull the blue chips up with it. We've already seen that the blue chips can float higher despite weakness in the broad market, but that is not normally a situation that can last very long. If the broad market firms and rallies, the blue chips are very, very likely to rally as well.

Those are expectations, not certainties. It's why you should always listen to what the market is trying to tell you rather than what you expect. Any break of that final trendline T1 would be sending a bearish message. But, unless the market does that, we should treat such a test as a good buying opportunity. That test could come Friday or Monday.

Our other lead dogs do not give us a great deal of confidence. The FTSE-100 in London tends to lead the US indices and has broken down. A straightforward Elliott Wave interpretation suggests that we have a powerful decline directly ahead as wave 3 of E kicks off. Elliott Wave interpretations can be wrong and this one just does not seem to agree with the other markets. However, it may be that London is presaging a big decline, so it warrants attention to be fully aware of the possibilities.

The SOX (Semiconductor Index) has been very weak for several days. A rebound in SOX could precede a rebound in the broad market, so it will be interesting to see how the market reacts Friday to Intel's earnings news announced after the close Thursday. Remember, it's the market's reaction to the news and not the news itself that is always what you should look for. Presumably good news which is greeted by selling is truly bad news. And vice versa, of course.

The big Employment Report is due out at 7:30 am CDT Friday morning (13:30 BST). Watch the bond futures' market reaction to the news along with the stock index futures, of course. Given the state of the market going into the report, it certainly looks like there is going to be a negative reaction in the stock market, but we will see — and soon.

MyClues Home Page Link

posted by Bob Carver  # 6:36 PM

If you've been watching our Relative Strength Table intraday, you saw it light up purple on Wednesday — that's our visual cue that the internals are diverging bearishly (it would have been green if the divergence were bullish). The SOX (Semiconductor Index) "lead dog" was the weakest as it declined 2¾% relative to the Dow. The NASDAQ-100 Index (NDX) fell 0.80% compared to the grandfather blue chip average, while the broad market Value Line (VLE) dropped 0.44% in relative strength. These readings are the lighthouses that warn sailors as they approach dangerous shallow water. The leaders are the canaries in the mineshaft, weakening first to warn the miners to evacuate the tunnel before the air runs out.

There are a number of Time Ratio Highs due now. And, Thursday will be the final day of that monthly seasonal we call the Monthly Buying Spree, which does seem to have come in right on schedule this month:

Gold Stocks. That oversold bounce of a rally in the gold stocks is nearing its peak and the next leg down could get started soon:

The Time Ratio High due next Monday may represent a retest of the upper Bollinger Band and the last chance to sell before the next leg down. Then, again, that decline could be getting started right now.

MyClues Home Page Link

posted by Bob Carver  # 9:11 PM

The market was actually reasonably strong in the face of rapidly-rising energy prices and interest rates. But, that's what makes the monthly seasonal (the one we usually call a Monthly Buying Spree) so special: new money comes pouring into the market and gets put to work. This has the effect of temporarily supporting the market.

But, we expect that rising rates right into the Employment Report due out at the end of the week will take their toll on stock prices:

After this correction/consolidation, assuming we don't see the rising support polytrendline in the blue chips broken, we should get another leg up into July:

MyClues Home Page

posted by Bob Carver  # 5:15 PM