Saturday, February 23, 2008

Stockcharts.com Weekly review

With the long weekend out of the way, what water has passed under the market bridge?

Joe leads off with is his Crude Oil chart. Note resistance dating back to November of last year:


Joe does not see the January bottom as significant for the S&P:


Or channel support in the Nasdaq:


However, the S&P does have Fib retracements to help:


Ted has a number of interesting charts. First there is the band of support at 352 for the Semiconductors:


With the Russell 2000 finding support at 689


But this support is countered by a breakdown in the point-n-figure chart which has a downside target comparable to a retest of January lows:


Maurice Walker has another epic to read. Light at the end of the tunnel?

The Financials were the catalyst to turn the market around in the last hour of trading on Friday. As CNBC reported that bond insurer Ambac is closer to a bail out deal expected to be announced Monday or Tuesday. The Financials had an intra day break down of their rising trendline being down 1.9 % only to close over 2 % higher for the day. I've been highlighting the positive divergence on the Financial ETF chart (XLF) all week.

The S&P 500 and the NASDAQ both bounced off the lower boundaries of their trend channels in their 15 minute time frames (1st & 2nd charts below).

Friday's Hammer candlestick on the S&P 500's daily chart, failed to confirm Thursday's bearish Engulfing candlestick (shadows are excluded from this pattern), as prices closed above yesterday's close and not below it, failing to get a follow through (3rd chart below). A tight pennant has formed on the S&P 500 (5th chart below), and during Friday's intra day move, prices broke below the pennant and things looked pretty dismal. But the S&P staged a dramatic turnaround having a 27 point swing from the intra day low of 1327 to the 1354 high.

The 60 minute index charts continue to remain oversold. The daily MACD histogram on the S&P continues vacillating back and forth with almost equivalent sized bars forming, which suggest that prices are consolidating.

The NASDAQ and the QQQQ broke their downtrends off the December highs the week prior to the holiday, and yesterday they appeared to be attempting to successfully backtest that move.

The weekly S&P 500 chart now has had 3 consecutive higher histogram bars, as our 2005 rising support trendline continues to hold (10th chart below). Meanwhile, the VIX weekly chart (7th chart below) is sporting negative divergence on the MACD and the histogram which is positive for the market. The down trend on the A-D line (pg 3) could breakout causing market breadth to turn positive.

Read part 3 after this. Last Wednesday the CPI data showed that consumer prices rose by 0.4 % in January, taking headline inflation to 4.3 %. Core CPI came in at 2.5 %. Rumors of stagflation, inflation, a bear market and a recession have plaqued the market for months now. Both the Wall Street Journal and CNBC recently featured stories on increasing stagflation concerns .

Stagflation is a combination of stagnation (economic growth [GDP] of less the 2 to 3 %) and inflation (rising prices). Stagflation occurs when the economy is moving from an inflationary period into a recession. Stagflation occurs when the an economy that is overheated (inflationary), which forces the Fed to raise interest rates to suppress inflation.

Stagflation occurred in the mid-70s, when inflation hovered around 12 to 15 % as the unemployment rate rose to 9 percent. During those years of stagflation, we saw the money supply increase dramatically. Between 1974 and 1981 the money supply grew by 60 % , in contrast during the Bush Administration over the past 7 years, the money supply only grew by 24 %. In the 70s high inflation occurred with a 9 % unemployment rate. Core inflation right now is at 2.5 %, and we have enjoyed an unemployment rate below 5%. Hardly stagflation criteria.

Inflation is not out of control, when you have a slowing economy you have a deflationary impact on inflation, a disinflationary as long as you stay above zero, not a stagflationary impact. You don't become deflationary until your under zero, in which prices drop and stop increasing. So for now, lets call it a disinflationary impact. Disinflation is a decrease in the rate of inflation, a slowing of the rate at which consumer and wholesale prices increase. Disinflation is acceptable. Even the Fed's inflation projections for 2008 and 2009 are lower than the current core rate of inflation right now. They project core inflation to be between 2.0 to 2.2 in 2008, and between 1.7 to 2.0 in 2009.

I'm not betting on stagflation, or that inflation will spiral out of control, nor a bear market or a recession . As Yogi Berra use to say 'It ain't over 'til it's over.' So far there is no evidence of a recession and we haven't meet the bear market criteria yet.

And in regards to stagflation, is what I am trying to say is, 'there IS absolutely no stagflation of any kind in the economy,' but to quote former President Clinton 'It depends on what the meaning of the word 'is' is. Clinton made this comment when he was questioned by prosecutors during his grand jury testimony, as to whether he had previously lied under oath in a civil law suit with Paula Jones, regarding his sexual relationship with Monica Lewinsky. Clinton was questioned on the statement made by Lewinsky that his lawyers presented Jones' lawyers which read, 'there IS absolutely no sex of any kind with President Clinton.' And when asked by prosecutors if that was a lie, Clinton replied 'It depends upon what the meaning of the word 'is' is. If 'is' means 'is and never has been' that's one thing - if it means 'there is none', that was a completely true statement,' he said.

So if 'is' means 'is and never has been' it would be a lie. Because there was stagflation in the 1970s. But if 'is' means 'there is none', then that is a completely true statement. There is absolutely no stagflation of any kind in the economy in 2008.

Next week we'll get the PPI data on Tuesday, new home sales on Wednesday, GDP revisions for Q4 on Thursday, and Friday the Personal Consumption Expenditures (PCE) inflation data.

Come watch the new video at thechartpatterntrader.blogspot.com

Richard Lehman uses the football analogy, but he is looking for a push to new lows to complete the November-February decline:

2/21 -- This is like the stock market super bowl, except without the entertaining commercials! The bulls have the ball, they run it for 100 points and THEY SCORE! They kick off and there go the Bears. They now run it back 100 points and THEY SCORE!!! The 40-day hourly charts show the big game the best. The edge is going to the Bears who now have field position, but the game is all tied up at the moment. You can't leave this one early!!!!!

2/20 -- A false break to the downside came back up but failed to break the upside in any chart. Therefore all remains the same for one more day. Meanwhile, oil and gold are chugging along on the upside while techs and communications are declining. So where's the leadership here - in financials? Oh yeah, that's where you want to be long right now!!??!!

2/19 -- WATCH OUT HERE!!! The charts are in a very interesting (and precarious) place. The action has been squeezed down between an uptrend line and a downtrend line on the large caps in such a way that a break either way could be a big one. The SPX is constrained between 1345 and 1362 and that won't last. Whichever line it crosses, that's the direction to go with.

My money says it will be down to complete the final Elliott 5th wave for the move that began last November. The one and three-year charts show a textbook pattern of waves 1-4 with wave 4 coming to an end now in a large triangle -- a perfect alternation with the zig-zag in wave 2. This shows up on the shorter charts as an upchannel and overlapping downchannel which are squeezing the markets into a corner from which it will explode out.

Yong Pan is also looking for a breakdown from the consolidation


With downside targets of 1,250 and 1,225



 
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