SPX – 1109.30

DJIA – 10,406

November 17, 2009

“All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.”

-John Adams, letter to Thomas Jefferson

Roily-Boily or Bull Trap?

The dollar-syndrome still calls the tune for stocks as well as gold; the stock correlation holds until it doesn’t but I suspect players are ripe for a change up or curve. The dollar is trending lower but its weekly swing chart is in its eleventh swing from its March high. A count beyond nine swings is rare but there’s no indication of a reversal yet. Conversely, the S&P 500’s (SPX’s) weekly swing chart is in its ninth swing up from its July 8th low (869.32), cautioning to be alert for a change.

Light volume and a net volume non-confirmation warn that a change may be afoot but that could change with strength today. Peak net volume readings on this short-term rally are +56.4 and +56.1 for the NYSE and NASDAQ respectively compared to (64.9) for the NYSE and(65.9) for NASDAQ into the November 2 low.

Volume acts as a barometer but the three most important technical factors are trend, trend and trend. The Market Trend Indicator (MTI), 3-day swing charts and 21-day rule are all signaling Uptrend. It would take a SPX trade below 1029.38 to reverse the uptrend under both the 21-day rule and 3-day swing charts.

The MTI is my favorite to identify and follow trends lasting weeks to months. It hasn’t signaled downtrend since the week ended March 20 and it stays in an uptrend until at least one key index closes below its respective 18% weekly exponential average. The SPX’s 18% average this week is 1056.54 and the DJIA’s is 9827. The New York Advance/Decline line is 5,548 net advances above its 18% average.

S&P 500 – Daily (Source: StockCharts.com)

The SPX rallied to yet a new recovery high yesterday as did the Nasdaq 100 (NDX) and Dow Industrials. The Dow Transports confirmed the Industrials by the skin of its teeth. The S&P MidCap index is close while the Russell 2000 and S&P SmallCap are further away.

It’s positive that the DJIA closed above the 50% level of the bear market (10,334). The SPX is nearing its halfway point at 1121.44, a natural resistance level. The NDX’s 50% level from its Internet-fueled peak is 2490.95, above it 2007 high of 2239.23. The NDX is well above its halfway point from that high, 1629.05.

Among S&P sectors,  all confirmed the move to new recovery highs except Energy, Finance, Utilities and Telecom. Within the 100 groups I monitor, 76 are short-term buys while 24 are short-term sales, a flip from 24 short-term buys and 76 short-term sells just a week ago.

The best performing groups reflect both an improving economy, a weak dollar and emerging market commodity demand. The top ten groups in order of relative strength as of yesterday are Platinum & Precious Metals, Nonferrous Metals, Paper, Gold Mining, Automobiles, Durable Household Products, Coal, Commercial Vehicles, Consumer Finance and Railroads. In international markets, three of the BRIC nations (Russia, Brazil & China) are leading the world while India has yet to confirm a new recovery high.

Early cyclicals such as Airlines, Steel and Heavy Construction are among the bottom ten groups as are Distillers/Brewers and Water (defensive groups). Mortgage Finance is the worst.

U.S. Dollar Index – Weekly (Source: StockCharts.com)

In other markets, the U.S. Dollar index would have to trade above its 3-day swing high on October 28 (76.82) to indicate a reversal in its intermediate-term trend. The Treasury Secretary is still “talking” up the dollar but China’s chief banking regulator believes loose U.S. monetary policy, including a weak dollar, is encouraging massive speculation in global asset markets.

Gold’s ascent is picking up speed. A swing measurement from the October 2008 correction low gives a potential target around $1700 an ounce but no one really knows how crazy prices could get in the speculative phase. My recommendation for speculators is to keep trailing stop sell orders loose but I think it’s time to raise that point a bit, from just under the August 17 low ($932.75 2nd London fix) to $964.

Gold – Weekly (Source: StockCharts.com)

Long-term government bonds rallied yesterday as Ben Bernanke confirmed no exit from government purchases of mortgage-back bonds before June 2010. My short recommendation remains intact with a relatively tight stop buy above the October 20 high (97.25 on the TLT).

TLT – Weekly (Source: StockCharts.com)

Dealogic reports companies with “junk” ratings issued $123 billion of new bonds so far this year versus $48 billion for 2008; it thinks the 2006 record of $143 billion could be surpassed. Moody’s thinks corporate defaults are at their peak.

The Bank for International Settlements reported the notational amount of over-the-counter derivatives (insurance against debt default) grew sequentially in the first half of 2009 as derivatives contracts with a notational value of $604.2 billion were sold in the first half of 2009, up 10% from nearly $547.4 billion in the second half of 2008.

Planned, deliberate speculation is a matter of self control, money management and market analysis. The rules are simple- trade with the trend, cut losses and let profits run. The trick is working on the psychology and discipline; it’s a tough business.

It’s important to plan ahead. The time to act is when something is happening. You want the trade to go in your favor from the start. Buy or sell more as the market moves in you favor. Buy and average up on the long side on breakouts and as reactions pass, and just the opposite when trading the short side.

The big money is made by sitting, not trading but handling profits can be a hard as handling losses. It takes discipline and patience to stick with positions. I think it’s foolish to trade with time horizons under one month because big winners are needed to overcome losing trades, skid and commissions.

KWB Philadelphia Bank Index – Daily (Source: StockCharts.com)


For long positions tied to the SPX, my recommend stop levels is just under the November 2nd low of 1029.38; it is both 3-day swing low and 21-day low and it violation would mark a trend reversal. Once the trend reverses, think some of the best shorts are likely to ETFs tied to small cap indices.

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.