Monday, August 18, 2008

Weekly review of Stock Charts

August is not known for its hectic trading. Is there anything we should be watching?

Maurice Walker comments on weekly charts:

As a technician I monitor the weekly charts very closely because they are the compass, map, and life jacket of the future direction of the market. But the bad news bears insist that we should ignore the improving technical situation that is occurring on the weekly charts and believe them. They continue to snub their noses at this rally and for the past four weeks they have been telling us that the market is going to drop tomorrow, well tomorrow has come and gone and so far our rising trendlines remain in tact.

Three weeks ago we witnessed the Russell 2 K weekly chart's histogram, move into positive territory. Last week the Nasdaq's weekly chart had the histogram turn positive, and now this week the QQQQ's weekly chart followed suit, as its histogram moved into the positive column. The Russell 2 K has been up for 6 consecutive weeks and is now testing the May highs. Both the Russell 2 K and the Nasdaq broke their down trends in the weekly timeframe this week. Additionally, both have rising 13- week EMAs.

He continues
But let me be clear, I think the July lows will hold up and I don't believe that the July lows were an artificial bottom.

Both VIX and VXN have bullish falling wedges on their 60-minute charts.The VIX 60-minute chart has the MACD coiling and looks ready to breakout as oscillators are oversold. But for the big picture the VIX monthly just got a bearish MACD cross and its histogram turned negative. While the VIX weekly just saw its weekly chart get a MACD bearish crossover right at the zero line suggest long term strength for the stock market.

I think crude oil will attempt a rebound as its MACD starts to recycle back up and gets a bullish cross. The recovery will likely stall near the broken intermediate trendline near 135 or test the 50-day SMA near 130. The energy ETF (XLE) already broke out of its bullish falling wedge having a bullish divergence in place on the RSI and stochastic and XLE got a bullish MACD cross late last week. But this could allow the stock market to catch its breath.

The dollar broke out last week of its lateral range and has now risen to overhead resistance on the daily chart. While this week the long term downtrend was broken on its weekly chart's falling price channel. I do expect a pullback as crude attempts a recovery. But as I have been saying, the dollar has not collapsed. It should start to carve out a new rising trend now that it has broken out.


On the health of the economy:
I think a lot of investors perceive that prices are going to drop considerably from here based on their perception that the economy is in a recession rather than the way things actually are. What they believe they are seeing with their eyes, is actually misleading and distorted. Because many of weekly charts such as the S&P 500 and DJIA recently sported bullish divergences. I don't think the economy is no where near as bad as people in the media claim it is. The media likes to play up bad news, especially in a year with a presidential election. And it is a proven fact that we aren't in a recession so far.

Americans and investors perceive that the economy isn't growing when in fact GDP accelerated to 1.9 % in the 2 nd quarter. But GDP fell short of the consensus of 2.3 %. Americans perceive that millions of jobs are being lost, when the nonfarm payrolls came in better than expected recently and revealed that only -51K jobs were lost in July, bringing the total jobs lost to just 462 K. Much better than the -75 K that was expected.

Retail sales came in line this past week at -0.1 %, on the soft side. But recently the counsel of economic advisors revealed that consumer spending is holding its own. Critics of the stimulus package estimate that approximately 20 % of the stimulus checks has now been spent, while many Americans have put the balance of the money into savings. I do believe that the stimulus checks will ultimately be spent. Congress targeted those in the middle-class that had the propensity to spend. I also believe we should soon start seeing the rate cuts kick in.

I would agree on his views on inflation; I think it has topped as commodties roll over. John Murphy suggests (If I can remember this correctly!) that commodity market tops occur on average about 9 months after stock market:

The headline CPI inflation rate was much worse than expected rising .8 % rather than the anticipated .4%. That brought headline inflation to 5.6 %. Core inflation rose by .3 % to 2.5 %. Energy rose by 4% in July and is up 29.3 % over the past 12-months. Inflation is probably peaking and should be much lower by the end of the year. The market ignored the data based on the recent stronger dollar. I prefer the PCE data which had been declining, but is now on the rise again. Headline PCE is at 4.1 %, while core PCE is at 2.3 %. High energy prices will be will discourage gasoline consumption and end up driving crude oil prices down. But if tensions continue to heat up between Israel and Iran, it could throw a monkey wrench into mix. Crude oil continues to be the wild card. But I believe that we have put in a bottom. But one thing is clear, inflation is artificial elevated due to crued oil and food (specifically corn). Therefore, I do anticipate that inflation is peaking.

It was amusing to watch this so called bad news of GDP two weeks ago and last week the CPI and retail sales data, and yet the market shrugged it off after the fact on GDP and moved higher. While the market rallied on the bad CPI report. Next Thursday on August 21, we will get the leading indicators for July. Which could be the knight in shining aromor that comes into rescue the market should the 60-minute rising wedges flourish early in the week. However, the selling could go on a bit longer if the sell is gradual rather than sharp.

Lastly, the daily financial ETF (XLF) got a bearish MACD crossover this past week and the Aroon up has fell below 70 and sitting just above 30 (page 3). While its histogram turned south.

So I believe that the market will pull back for the short term and then resume the advance aggressively. I am long term bullish. I do expect the histograms on the QQQQ and S&P's 500 weekly charts to move into positive territory next week or the week after that. thechartpatterntrader.com

Yong Pan watching out for topping signals. Technicals mostly in the green (or neutral).


Will the S&P make it to the 200-day MA before (if?) the wedge breaks:


Interesting note on the VIX for the S&P:


Joe Reed gives his low down on the week:


Joe has a lovely chart showing the Oil Service Index:


Note the rise in the Energy Bullish Percents while the XLE spends another week at support:


Ted Burge is one of the few to show the NYSE Composite Index and the lack of action, albeit at 8350 support:


His point-n-figure chart for the Nasdaq 100 shows a picture perfect cup-and-handle breakout


Finally, Richard Lehman comments on the week:
8/16 -- As another whacky week of zig-zagging and an option expiration fold into history, let's look at the current picture. Short term, stocks are still in the green upchannels off the July lows.The mighty small caps hit new highs for the move this week, but the big guys did not (causing me to draw the tentative downtrend scenario shown on the INDU 5-min chart here in purple.) The Dow did stop on that line 3 times, but it's still not a sure bet...though we should know early this week.

Meanwhile, the Naz is still at the upper line of its long term downtrend. It went a hair over it on the one-year, but remains just under on the three-year. Optimists can look at that and say they are ready to break upward and confirm that the bottom is in, but realists can say they came right back to where the channel would repel them and they are poised for a fall again. (Until we see some bonafide breaks, the realists have the advantage.)

Let me impart another scenario: the small caps could break above these lines by a small amount and then retrace, unconfirmed by the large caps and leaving us with little more than a slope change of the downward channel. With out the large caps, and with such awful fundamentals, I have to lean toward this scenario...if there is a breakout at all...and that would mean another sell off coming.

8/14 -- Gold and oil collapse, the equity market rises, and small caps outpace the large. Same story - different day! I drew in a scenario on the Dow for a downchannel off the recent high, but there is really nothing other than one lower peak to confirm that scenario. We're still where we were several days ago: no breaks to the downside of short term channels and the small caps right up at the long term resistance line from 2007. Tomorrow will be option expiration, so let the games begin.


Other news:

As the Senior Market Technician for Zignals we have just launched our latest version of Zignals Stock Charts. The latest update of our FREE charts has a chart annotation tool with ability to store charts. I have provided our chart developer with the comments on what I would like to see improved, but we welcome comments from all of my blog readers so we can set priorities for the next stage of development. If you would like to contribute, head on over and sign up (only your email address is required to join)


Dr. Declan Fallon, Senior Market Technician, Zignals.com the free stock alerts, market alerts and stock charts website
 
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