Bonds

Here is a very long term chart of the 10 year Treasury futures contract. Previous reflation episodes were accompanied by multiyear 25% retracements on average. This time should be no different.

The New Bull

From time to time, it's best to tune out all the noise and just take a look at a chart. The emerging bull - Europe:

Secular Bull Legs

Secular bull legs before corrections greater than 10%:

If the market falls

January 21, 2013 - long term strength, short term weakness

The bull market is showing good strength over the long term, but the short to intermediate term is not looking very good.

Here are two long term indicators that have reached new levels of strength for this bull and are breaking the pattern of  multiple divergences associated with bull market tops.


> NYHL - 52 week new highs - lows

> the percentage of S&P 500 stocks above their respective 50 day moving average.

This suggests the bull may enter an acceleration phase, a fact also supported by the strength in employment and housing. These may have reached their peaks for the recovery, but no bull ends before these indicators have weakened for a while.

Here is a a rate of change in the unemployment rate and a housing market index.

Meanwhile, shorter term indicators are not so good looking. Breadth, as expressed by the 13 day EMA of TRIN, is clearly diverging with the market.

This kind of divergence signals a  bigger correction with great precision, especially when the environment is favorable, as suggested by the record low VIX...

... or, by the slowing down pace of change in retail sales.

Usually. a more important correction comes after a significantt level of resistance is hit on the long term charts. Here is the monthly SPX.

The market has just broken above the previous highs, 1474 - a possible level. The next one to the upside is 1522 - a bit far, but not unreachable.

Which one is it? My guess is 1474, but it's only a guess. We'll get a first clue during the following days. The market has committed on the daily chart above the previous highs, so at least a small correction is in order. The market could tip its hand on this correction.

Here is the daily SPX.

December 17, 2012 - target 1522

The market seems to have tipped its hand since I last wrote. It has strengthened up after reaching intermediate term oversold levels, as shown in my previous post.

Here is a monthly chart of the SPX.

The bull market has a tendency to correct at long term resistance levels. The next one to the upside is 1522.

A move to this level would also represent a break out of a rising wedge - not uncommon for this chart pattern.


The economic picture has  some points of weakness, but consumption, as a consequence of a continuing recovery in employment, is doing ok.

But this is a symptom of an ending recovery. Businesses have expanded their profits first, then they added equipment & software and then they started adding more workers, which led to higher consumption. Now, they are cutting back on investment and they will soon slow down on hiring. Here is a chart showing the correlation between capital expenditures and employment. Capex leads employment.

So, during the first half of 2013, employment reports will most probably get worse and worse. The market will ignore this for a while, since this means the Fed will stay easy, but the Wile E. Coyote moment will come, just in time for the upside break out of the wedge to fail, as it many times does.

August 21, 2012 - the concept of commitment

Generally, as the SPX commits beyond an important level, an inflection point is created. Here is how this principle has worked lately.

By commitment I understand a close or a strong move far enough beyond a certain level.

This concept of commitment is nothing else than the general contrarian approach so indispensable to any trader, applied for the short term. If detecting the crowd commitment over the long term is easier, doing it over the short term is a bit challenging. The method illustrated above is an answer to this challenge and it provides an interesting way of looking at market action.

Bear flag break-out and head & shoulders

The market is set for a short term bounce but the overall picture looks bearish. For now, by my measures, this is still just an intermediate term correction (7-10%) in a bull market.

The dollar - the "more monetary stimulus" hysteria

I previously commented on the dollar here. I was expecting a drop to the first important support level (lower blue line in the chart below). This expectation was formulated in the context of an extension of the market rally to 1450 SPX.

Weekly chart of the June contract for the US Dollar index. 

Since then, however, the SPX seems to have put in an intermediate term top and the dollar is forming a diamond chart pattern.

A diamond is a reversal pattern but I do not rely too much on the predictive value of chart patterns. I only take them seriously when the market is breaking out.


A break out may happen when the market realizes how foolish it is to already expect more monetary stimulus from the Fed. The deceiving employment report  has inflamed some impatient spirits.

The Fed does not change course from day to day. It can break the dollar rally but it would have to hint at it first. For now, all the hints where in the direction of no more stimulus.

Nasdaq Inverse H&S

Inverse head&shoulders with break-out on the weekly Nasdaq100 chart.The pattern is projecting to 2800, a 15 % rise from here. A move to 2800 would make the leg up that started in December about 37% long, equal to the rise from September 2010 (green box).