No Time to Doze

SPX – 1113.10

DJIA – 10,442

June 22, 2010

“Technical analysis is a windsock, not a crystal ball.”

-Erin Swenlin, DecisionPoint.com

I sense investors are primed for the summer doldrums, a trading range for the stock market much like 2004, bound at the high end by slowing earnings growth and at the low end by China’s development, old fashioned American spending and a corporate cash build up. Following multiple bear market technical indications in May, buy signals were triggered last week, at least for speculators trading intermediate-term trends.

The S&P 500 (SPX) closed above its 200-day moving average last Tuesday as its weekly swing chart carved out a pattern of higher lows and higher highs, signaling uptrend. Already above its 200-day average, the Nasdaq 100 (NDX), followed suit on Wednesday, the same pattern on its 3-day swing chart. Volume was light both days, but the price action confirmed May 25 (SPX-1040.78) as an intermediate-term low. The Market Trend Indicator (MTI) shifted to uptrendon last Thursday’s close but after yesterday’s reversal, is back at NEUTRAL.

There’s no hint in my technical work indicating momentum is likely to evolve on the upside; instead, it’s a case of day-to-day swings teaching traders not to chase strength. The first secondary rally after a primary downtrend is signaled typically retraces one-third to two-thirds or more of the first section down, often carrying further and lasting longer than reactions later in the cycle. Through yesterday’s high the SPX rebound retraced just over 50% before reversing on the summer solstice, harmonics in play and warning to be alert for when the intermediate and primary trends are once again in synch. The pattern looks to me like it should support at least one more short-term rally, perhaps after the Federal Reserve releases its minutes Wednesday, but it’s no time to doze.

The MTI is poised to signal either uptrend or downtrend, and while I suspect it’s uptrend first to put the bulls at ease, the plan is to be prepared either way. Stay disciplined, guarding against large losses on long positions by taking their first small loss when indicated and preparing to initiate shorts when signaled. The SPX’s 18% weekly exponential moving average is 1116.18 this week, just above yesterday’s close. The DJIA is slightly above its 18% average (10,460) and the New York Advance/Decline is 2,012 net advances above its 18% average. Peak net volume readings are +44.8 for the NYSE and now +49.1 for NASDAQ,neither bettering hurdle rates of (70.9) and (71.3) respectively that needed to be surpassed to be more positive on this rally.

Gold Mining in the number one group in terms of relative strength, up from the bottom ten list as recently as the week ended February 5 before returning to the top ten list six weeks in a row. Reflecting the search for yield, REITs are in the top ten and Utilities have been the strongest sector over the past two weeks. At this point, I expect most of the weak groups to stay weak. The bottom ten group list from worst to best is Containers & Packaging, Business Training & Employment, Travel & Tourism, Home Construction, Asset Managers, Aluminum, Oil Equipment & Services, Coal, Specialty Finance and Diversified Industrials.

In other markets, gold broke out to new highs reflecting the run from paper money. Ludwig von Mises, the late Austrian economist once explained, “Government is the only agency that can take a useful commodity like paper, slap something on it, and make it totally worthless.” The World Gold Council reported that Saudi Arabia’s gold position doubled to 322.9 metric tons. Global central banks in total own 30,462.8 metric tons. The speculative phase well underway in this market, the SPDR Gold Trust (GLD) holding nearly 1,308 tons and growing in a self-fulfilling cycle. I’m keeping stop positions below the March 24 low ($1090.75 2^nd London fix) for newer positions and below the February 5 low ($1058) for long held positions with plans to ratchet this levels up if the price gains accelerate.

As for long-term government bonds, I still haven’t gotten a clear indication of a trendline break to initiate short positions. If my stock market read is correct, I suspect flight-to-safety buying to postpones big gains on the short side. I also expect the U.S. Dollar index to rally to rally to new recovery highs before initiating short positions.

Harmonic Preview:

(Higher Probability SPX Turning Point or Acceleration Days)

June 25                 (Friday)

June 28*              (Monday)

July 1*                  (Thursday)

July 9                     (Friday)

July 14*               (Wednesday)

July 16                  (Friday)

July 22*               (Thursday)

• An asterisk denotes a dynamic SPX price square in time; different factors account for the other dates.

Conclusion:

Buy indications were triggered last week and if you’re following my lead you’re long ETFs tied to the NDX and SPX. If it were a bull market, initial stop positions would be below the June 8 test lows but I recommend a higher level, just below the June 1 low for the SPX (1069.89) and under the June 2 low for the NDX (1832.58). Once we have evidence the rally has run its course, I think short positions tied to small cap indices,  Basic Materials and other economically-sensitive sectors and groups make the most sense.

For non-investment professionals who didn’t cut back exposure to stocks on the initial break, you should lower your worldwide stock exposure by 30% or more with plans to exit the rest, ideally on strength. If prices were to sell off from here and break the May 25 lows, I would sell the rest. It’s no time to freeze or bury your head in the sand.

The information contained herein is based on sources that William Gibson deems to be reliable but is neither all-inclusive nor guaranteed for accuracy by Mr. Gibson and may be incomplete or condensed. The information and its opinions are subject to change without notice and are for general information only. Past performance is not a guide or guarantee of future performance. The information contained in this report may not be published, broadcast, rewritten or otherwise distributed without consent from William Gibson.