Mac Chronicles ...
CHARTS
Looking at the charts actually reveals what should/would be expected. That is, a massive battle going on between the bulls and the bears at very important support levels. To me, it is kinda like American football when the team marches down to the opponents 2 yard line. The crowd roars, every move is analyzed, both teams put the big uglies right up to the line of scrimmage, just waiting for the huge moment of contact. That's what we're seeing so far, and while the bears have the data on their side, the bulls are not giving up without a fight. As my conclusion at the end will explain, the markets are very undecided as to which way they will eventually move. I suspect that the unprecedented number of 90% up days (over 90% of all stocks closing up versus the previous days’ close) and 90% down days in the month of August is due in large part to this indecisiveness along with many of the big boys sitting on the sidelines uncommitted and waiting it out.
Closes are a big deal for candlestick followers, and we ended yesterday with both a weekly and monthly close. So let’s see what they are telling us, if anything.
The Transportation Index is considered a harbinger of what the “real economy” is doing, as it measures the transportation of goods across the country. As long as the transports stay above 4783 (78 week m.a.), they are signalling that it is still okay to be long. But 5,000 is now huge
resistance, as that was the low for the index in both May and June.
We are currently sitting right on top of the long-term trend line with the 78 week moving average at 4783 and the Index a mere 2% above that at 4878.
The financials (XLF and IYF) are already in bear mode, and any move towards the 78 week moving average should be sold. That level on the IYF is 112. Shorting here with a stop at the 113 level would be advisable, producing an approximate loss of 5% if I am wrong. The financials will suffer big write-downs for the remainder of the year and much of their income model is no longer producing income, as they are no longer issuing high profit margin mortgage backed securities along with the fact that their costs of funding has dramatically increased, a big deal when your companies’ balance sheet is as highly leveraged as are the financials.
Note that one of the smartest and shrewdest in the financial industry for the past few decades is Charles Schwab. While much of his holdings are in trust, he still held approximately 22 million in tradable shares. Last week he sold over 17 million of those shares (approximately 77%) and cashed out US$340 million. It doesn’t appear that he is very positive on the sector (or his stock) in the near future.
Gold continues to move into a narrow triangle, and as Bill Kaye has pointed out, will probably move higher, but later than most people think and with perhaps a move down in the short run to shake out stale bulls. Note that the HUI Index has gone nowhere (between 300 and 370) for nearly two years now. Bulls have to be frustrated. But if we see a socialization of losses and a large printing of money, gold should surge. But until and unless that happens, I suspect that many of the large funds are long gold and may be forced to sell down their holdings on any further deleveraging. But the metal is narrowing into a wedge as the range of prices has narrowed. It could possibly have a very large move once it breaks out either way. It would be advisable to watch very closely for a breakout.
As an aside, four of us went to two branches of the Bank of China to buy the 2007 one ounce Gold Pandas. Each branch had only two coins left for sale. We will visit the distributor on Monday to try and buy more, for if they are out, they are sold out for the year. It is interesting to note that they sold out of Pandas at the end of October in 2005, but it appears that they may be sold out by the end of August this year! That implies that there is still a strong underlying demand by retail for gold. And as the Chinese consumer gets wealthier, that will naturally increase the demand for these coins.
Also note that Tokyo has planned an ETF for gold next spring. As they buy, the ETF is required to buy physical gold to back up its asset value. Another positive for the metal.
From the lows set in 2003, the US 10 year Treasury has been making higher lows in yields since then We are sitting right on top of that trendline, and appear to have broken to the downside this week. Has the credit market finally indicated that we are headed back to deflationary times? It looks like it just might be saying this.
The Yen and the Topix (best proxy for the stock market) have always trended and moved along an 18 month moving average for the past 20 years. The Yen has now broken through its 18 month moving average as has the Topix. The Topix tends to follow the yen, as the earnings are largely influenced by the exporters, whose earnings move in sync with the strength or weakness of the yen. The monthly close seems to indicate that the Yen has started its strengthening move and the target for the Yen should be in the 102 area over the next 12 -24 months.
The Topix chart looks similar and appears to be headed lower.
Ah, the S&P 500. It has touched and bounced off the 78 week (1.5 year) moving average once in 2004, twice in 2005, once in 2006, and again a couple of weeks ago. So the bulls are still in charge on a longer term perspective. To me, it appears that any upside is capped at approximately the 61.8% fibonnnaci number of the move from the highs in July to the lows in August, which is quite close to the daily lows set in May and June (twice) around the 1485 number. As we move towards that former support, you expect to see stronger selling by those who are long and want to “get out even.” So there are lots of key numbers and support here. Setting shorts at Friday’s close, with perhaps a stop for half the position at the 1485 level on a daily close (allowing for a 1% loss) and closing out the entire position if the Index makes new highs with a close above 1555 (approximately a 5% loss) would make for an interesting entry point for a trade if you are bearish here. For the bears, a confirmation will come on a weekly close below the 78 week moving average, which is currently at 1385. For the bulls, the confirmation comes on a close above the highs made in July.
... continued |
