Tuesday, June 1, 2010

Yesterday's Markets

Starting mid-week, it appeared the markets were moving in a position to technically rebound. First, let's revisit the chain of events that got us here. Fear of EU problems leading to a big economic drop caused a drop in the euro. This led to an increase in the dollar, which led to a drop in commodities. Stocks dropped out of concern about corporate earnings. US Treasuries caught a safety bid, driving down US interest rates.

The euro looks to be forming a double top. However, the EMA picture is still very weak with the shorter EMAs below the longer EMAs, all the EMAs moving lower and prices below all the EMAs. But technical indicators are pointing to a reversal. Money is flowing into the security (b and c0 and the MACD is pointing to a reversal of momentum.

Conversely, the dollar appears to be printing a double top. But the EMA picture is still bullish with the shorter EMAs above the longer EMAs, all the EMAs moving higher and prices above all the EMAs. Technical indicators are pointing to weakness. Money is flowing out of the security at the peak (b and c) and momentum is decreasing, especially on the second top of the double top (d).

The long-end of the Treasury market has caught a safety bid, driving prices higher. But, prices may have formed an island reversal (a). While the EMA picutre is still bullish, it is weakening a bit with the 10 day EMA starting to move sideways and prices a bit below the EMAs. Also note the decrease in the A/D and Chaiken Money Flow indicators, which indicates people are selling (they are probably taking profits). Finally, the MACD is giving a sell signal (e).

Oil dropped hard on the EU news, but it to appears to be rebounding. Prices have clearly reversed (a), printing several strong bars with gaps. While the EMA picture is still negative (b), we are seeing a reversal in the shorter EMAs. The A/D line and Chaiken Money Flow indicate money is flowing back into the security and the MACD has given a buy signal (e).

Finally, we have the equity markets. While the price picture is still negative, notice the A/D and Chaiken indicators (a and b) tells us the sell-off didn't drive investors away from the markets. Also note the MACD is close to giving a buy signal (c).

The above is a technical reading of events. Given the severity of the sell-off we would also need a fundamental driver for the markets to truly reverse. So far we have had the EU creating the $1 trillion dollar bail-out fund. But traders are concerned this plan is not yet fully developed and therefore not credible. In addition, there is the issue of coordinating the plan among the EU nations which is a bit like herding cats. In other words, so far there isn't a strong fundamental reason to reverse course.