Technicals | Jul 21 2010
By Rudi Filapek-Vandyck
The TechWizard has been pointing out these past weeks how weak/vulnerable US equities look from a technical perspective. Surely, if the US economy was as healthy as many an economist is trying to argue, the US share market would look a bit more healthy too?
He has observed yesterday's rally on Wall Street has now pushed the S&P500 index above 1080. This should definitely get the market bulls excited, he says. Alas, his own proprietary trading system is flashing red warning signals, indicating underlying momentum remains bearish.
As shown on the 300 minutes chart for the S&P500 futures (above), in late June the MACD crossed and turned bearish while price bars generated by the Wizard's own system equally turned red, as an indication of bearish momentum. This bearish momentum subsequently took price action much lower over the following sessions.
Yesterday's price action could mark the beginning of an improving technical picture, but the Wizard sticks to his bearish outlook. So far, this rally hasn't even managed to put a second (double) top on price charts, he notes, which is not a signal of underlying strength.
While a break above 1080 is a positive, the Wizard will continue observing price action in the sessions ahead very closely. A retreat and subsequent break below 1050 on a closing basis would be very negative, he says.
Technical market analysts at Barclays Capital have a similar story to tell. They have been observing the Reuters/Jefferies CRB index for commodities and frankly would have expected to see a better performance.
Looking back at history, the analysts recall that back in 2009, when the US stock market was still falling, the CRB index based and started to recover before the US share market did. And when “risk on” became the theme in Q1 this year, the CRB had already topped out and started falling. This, say the analysts, suggests there are times when the CRB Index can be used as a leading indicator for “risk”.
Now you understand why the analysts are so disappointed that the recovery in the CRB Index that seemed to be taking place in May is already struggling to continue. As shown on the second chart above, the CRB Index remains locked in a downtrend channel and to make matters worse: momentum is rolling over bearishly.
The team at Barclays notes there is also a “cross of death” on their price chart (they use the 100 and 200 moving averages). It is difficult to ignore the fact that the recent uptrend is faltering, they conclude.
So far they have stuck to a neutral stance for commodities, hoping that the head-and-shoulders formations on price charts (not yet completed) for individual metals would indicate a base was forming from which the next rally can take off.
However, say the analysts, were the trendline for the CRB Index at 256 to give way in the coming weeks, they would revise their stance from neutral to bearish, as such a breakout would target channel support.
The TechWizard is the pseudonym of Scott Morrison, whose experience in financial markets exceeds twenty years. Morrison operates his own website nowadays at www.techwizard.com.au The views expressed are the authors', not FNArena's (see our disclaimer).
