Trading-Strategy Blog

ECRI’s Lakshman Achuthan Says More Than 50% Chance Of New Recession

Jason Dekker — Wed, 01 Sep 2010 22:10:26 +0000

More Dollar Strength Ahead

Jason Dekker — Wed, 01 Sep 2010 00:48:23 +0000

As we move into the fall it sure looks like we are going to enter another bull phase in the US Dollar. As evidenced by the chart below the technicals seem to be pointing to a minimum move back up to the 87 level. The Dollar index needs to break above its recent highs to confirm that this move is in effect or its just another set-up.

A move back to the upside is also consistent with my view that we are going to see more deflation ahead. This should also correspond with a reversion to risk and a continued move out of equities and risky assets in general over the next few months.

Big Week of Economic Reports

Jason Dekker — Tue, 31 Aug 2010 01:39:02 +0000

This is a jam packed week filled with big economic reports:

Tuesday: Chicago PMI, Consumer Confidence, Case-Shiller Home Price Index and FOMC Minutes
Wednesday: ADP Employment, ISM Manufacturing Index
Thursday: Jobless Claims, Pending Home Sales Index
Friday: Employment, ISM Non-Manufacturing Index

The economic numbers seem to be getting worse and worse over the last 3 months and expectations are very low for many of these reports. If the reports are better than expected I think we can expect to see the markets hold up and maybe even trade slightly higher. If they come in worse than expected I think there is a possibility of a big sell-off taking us to new yearly lows.

It would not surprise me to see a few beat expectations and few disappoint to the downside. It really is all going to come down to Friday’s employment number. Goldman Sachs came out today and revised their estimate for private job growth to zero which if true won’t be taken kindly by the markets.

Either way I think the stock market is firmly entrenched in a down trend and has some tough sledding ahead of itself moving into September and October.

Big CEO’s Bash Obama

Jason Dekker — Thu, 26 Aug 2010 22:02:03 +0000

Euro/Yen Signaling Major Market Weakness

Jason Dekker — Mon, 23 Aug 2010 21:56:01 +0000

The Euro/Yen cross has been one of the best indicators of risk and stock market direction for the past few years. It is now moving towards making new lows since its peak in 2007. This can’t be seen as a positive sign moving into the next few months which are typically the worst for equities.

Here is the chart and notice the break towards new lows today:

The Banks Look Weak

Jason Dekker — Mon, 23 Aug 2010 18:54:07 +0000

The stock market as a whole looks like it is just starting another correction phase led to the downside by the banks. In my opinion the banks are the lynch pin that will move this market either up or down. Right now with the current head and shoulders pattern on the bank index, see chart below, I think we are in for a double dip. The banking sector is one of the most important to the economy and is also the sector that lead both decline in 08 and the advance in 09.

While many market pundits are quick to dismiss the double dip as a possibility the fact remains that every stock market decline as large as the one we saw in 08-09 led to a double dip. Just look at the 1930′s, the 1970′s, and Japan in the last 20 years. They all experienced a double dip and this time is no different.

Don’t believe me…take a look at JP Morgan, Bank of America, and Wells Fargo. They are all trading at or near 52 week lows.

Here is a chart of the bank index:

Hindenburg Omen

Jason Dekker — Sun, 15 Aug 2010 22:32:30 +0000

Over the last few days I have seen several headlines about the “Hindenburg Omen,” an obscure technical stock market set-up that suggests bearish price action ahead. My take on it is that the market is going significantly lower and this just provides more confirmation of my already bearish stance. While many people have never heard of the Hindenburg Omen I have been familiar with it for many years and it is a fairly reliable signal. The average return over the next 3 months is -2.6%. You should also know that the probability of a move to the downside greater than 5% is 77%. With a 77% probability of more than a 5% downside move this indicator suggests we all heed its warning.

Here is an excerpt from a Bloomberg article about the Omen:

This week’s plunge in U.S. stocks triggered a technical indicator known as the Hindenburg Omen that may signal a more severe selloff, according to analysts who follow charts to predict market moves.

The market signal, named for a German zeppelin that caught fire and crashed more than seven decades ago, occurs when an unusually high number of companies in the New York Stock Exchange reach 52-week highs and lows. The indicator last occurred in October 2008, according to UBS AG.

The number of stocks at a 52-week high must not be more than twice the number marking lows, the technical theory also says, according to analysts. The indicator is only valid in a rising market, as defined by the NYSE Composite Index’s rolling average value in the last 10 weeks. It must also occur when the NYSE McClellan Oscillator, a measure of market momentum, is negative.

The Hindenburg Omen must be confirmed with a second occurrence within 36 days, according to Riesner. He said the signal occurred seven times in 2008 as the S&P 500 posted its biggest annual drop since the Great Depression.

Source: Bloomberg

Line In The Sand…S&P 1107

Jason Dekker — Wed, 11 Aug 2010 05:37:20 +0000

After today’s market action I think the line in the sand is 1107 on the S&P 500. If we break and close below that level I’d put the odds at a double top at 80% with large bearish potential going into the fall. There are bearish divergences set up stemming from the Dow breaking the June highs and no other broad market average following suit. The Russell 2000, the bank index, the semiconductor index, and retail are all lagging big time and they all led the rally both from the lows last year and from the February lows this year.

In addition and probably more importantly bond yields continue to collapse. This in my opinion signals a double dip, slower economic growth, and a return of the bear market. I am looking for an August top and decline into the end of the year with a possible rally late in December albeit from much lower levels.

Here is a chart of the S&P 500 and note the double top forming and the bear flag that is about to break to the downside:

Dollar Bottoming???

Jason Dekker — Tue, 10 Aug 2010 05:44:10 +0000

The Dollar has dropped about 10% since its mid-June high and looks to be on the verge of bottoming. The daily sentiment index reading is 6% bulls which is extremely low and typically at a level where bottoming action takes place. Also, it is getting close to support at the 80 level. Tomorrow, the FOMC announces its decision on interest rates and everyone has been selling the Dollar in anticipation of more stimulus and/or quantitative easing part 2. I don’t think we will get either in the short term which should give the Dollar a boost.

If the Dollar does make a meaningful bottom here it could also serve as a bearish sign for equities and commodities. They both tend to rally as the Dollar declines and fall as it rises.

Here is the chart:

S&P 500 Still In A Holding Pattern

Jason Dekker — Sat, 07 Aug 2010 23:59:54 +0000

Regardless of the weak jobs number on Friday the S&P 500 held above its uptrend line. The index continues to trade in an upward sloping band that is bullish until it breaks to the downside. Right now, odds favor a test and a break of the June 21st highs and a potential run into resistance at the 1140-1150 level. As long as the S&P continues to stay in this band it will have an upward bias. I suspect later this month we will have a break to the downside but until then stick with the trend. Here is the chart with the uptrend lines and channel bands: