Tuesday’s Trading – 9/1/09

The good news of the Chicago PMI was sold at 9:45am on Monday, which is a potential signal that traders are using good news to unload inventory. The market has been shrugging off good news for a while now.

SPY finished strong with the help of XLF, however XLF still left a sizable gap behind, along with the other major ETF’s. So the close may only turn out to be a short-lived moral victory for the bulls.

SPY bounced as soon as it neared its August 21st gap, however IWM dove deep into its gap from the same day. The gap held, but IWM did twice as badly as DIA on the day, and the relative under-performance of the small caps demonstrates continued risk avoidance. DIA closed below its August 25th gap, so that is also a sign of weakness.

The IWM pierced its 20SMA, but was able to close above it. And the SPX held the 1014 area, so those are bullish factors.

Not only did the EEM close below its August 21st gap, but it opened a new gap overhead that is triple the size. That’s a statement. China may not have crashed our market, but it certainly has sucked the risk-appetite out of it. Two weeks ago, China knocked our market down in similar fashion and the SPX rebounded the next day and immediately ran to a new high. Maybe it will do so again, but China has proven that its problem was more than a hiccup, and maybe we shouldn’t expect the SPX to shrug it off so quickly this time.

The talking heads on CNBC were unanimous in their opinion of the Shanghai Index: it is a phony market populated buy fools and gamblers, and it has no bearing on the rest of the world’s markets. It sounds to me like the talking heads might be lugging a little bit too much inventory…

SPY rallied into the close on increased volume, as compared to Friday, but it was unable to eat into any of its morning gap. That is a sign of weakness.

The Advance/Decline line rolled over, and its pattern looks very similar to the pattern that it made at the peak in June.

A while ago, I mentioned that I didn’t have to wait in line at the barber on Saturday afternoons any more. Well, it isn’t just my neighborhood. It is a nationwide phenomena, and nothing screams recovery like people cutting their own hair, right? The Wall Street Journal thinks it’s funny, but if the USA is a service economy, and everybody starts to do their own services, where does our economy go?

Monday’s Trading – 8/31/09

On Friday morning, I mentioned the bearish volume action in the IWM. And sure enough, the IWM had a bad day on Friday. Not only did the IWM do much worse than any of the other Big Five ETF’s, but it also closed its August 25th gap. It had dipped below that gap before, but Friday was the first time that it closed below it, and that is another bearish sign.

DIA has the same gap as IWM from the 25th, however it managed to close above it on Friday. DIA was down on the day, though holding that gap can be seen as a bullish signal. On the other hand, DIA’s relative strength to IWM may be a sign of risk aversion as investors head for the safety of the less-volatile large caps. So, DIA is an important ETF to watch on Monday. If it closes below its August 25th gap at 95.14, that would be a rather bleak sign for the market.

I have been talking a lot about the QQQQ’s TARP gap recently, and at the peak of Friday morning’s exhaustion gap, the Q’s tagged the top of the TARP gap at 41.08. That was the close on September 26th, the day before Congress shot down the TARP. However, the Q’s were not able to close there, so the gap is still considered strong resistance. If the Q’s can close above 41.08, that would be a bullish sign for the market, though a return to a gap such as this very often marks an important top.

The SMH broke out of its trading range on Friday and made a new high. So that is an important development. However, it is not a panacea for the Q’s because the cyclical semi stocks have a small weighting in the QQQQ. For example, AMAT only has a 0.6% weighting according to this page.

Friday’s Trading – 8/28/09

If you look at an intra-day chart of IWM on Thursday, you will see strong volume all afternoon. But it wasn’t enough to push IWM into the green. That is a sign that the supply/demand balance may be shifting in favor of supply, which would be bearish. And the market cannot get far without the IWM.

Thursday’s Trading – 8/27/09

The TARP Gap has been holding the Q’s in thrall for almost a month now, and has been very powerful resistance. However, the Q’s are still “crawling along” the lower boundary of the gap in the $40.40 area, so they are steadily eating away at the resistance. On the other hand, that gravestone doji on Tuesday looks a lot like the one that printed on June 11th.

The market looked shaky on Wednesday morning, but the XLF, IWM, and DIA all found support at their Tuesday-morning gaps. However, the IYT fell through its gap and closed beneath it. That could be a problem since many old-timers consider the transports to be an important indicator. The EEM has also fallen below its Tuesday-morning gap, and both of these ETFs should be watched for clues as to which way the market will break. The XLF is struggling with its August 7th intra-day high, and the XME still can’t take out its June peak. Both of those ETF’s will also need to get with the program if the rally is to run higher here.

The market action is looking very similar to that of the June 11th peak. If I remember correctly, everybody was predicting a huge breakout back then. The market did the opposite of what was expected, and punished the bullish fervor with a false breakout, and then a dive.

This time, I get the impression that most traders are betting on a correction. So perhaps the market will give them a false breakdown, and then rocket higher. Just something to think about…

Wednesday’s Trading – 8/26/09

A few days ago while discussing the lack of volume in this rally, I linked to astory about pension funds shunning stocks. But perhaps the problem goes beyond that as described in this piece by ContraryInvestor.com. It seems that foreigners are taking a rather dim view of US financial assets. Here is a quote:

“In short, on a twelve month moving average basis, the foreign community has become a net seller of US government agency paper. This is a first in historical experience…”

This makes sense to me as the USA is relocating its economy to Asia. Why would anybody invest in the financial assets of a country that is dismantling itself? Why not just run ahead of the plan and buy the stocks of Chinese and Indian companies?

So, not only does the stock market face the headwind of reduced leverage, but it must also now face the prospect of fewer sales to foreigners for a long time to come.