Thursday, June 3, 2010

Yesterday's Markets

Let's start with a look at the euro and the dollar, because it is the inverse relationship between the two that is at the heart of current market action. Remember:

1.) The euro dropped because of the Greek situation

2.) As a result the dollar and US Treasury Bonds rose in a flight to safety, and

3.) Stocks and commodities fell as money fled risk assets.

For awhile, it appeared the dollar might be forming a double top. But while the dollar appears to topping, the formation how appears to be a triangle (e). Note that prices have found resistance in the 25.50 area on several advances. While the short, medium and longer-term trends are still bullish (d) (the 10, 20 and 50 EMAs are all rising), the A/D and Chaiken Money Flow are weakening (a and b) and the MACD has given a sell signal (c).

The euro appears to be bottoming (a), finding support at the 121.50 area. And while all the trends are still negative (e), the A/D and CMF indicate money is flowing into the ETF (b and c) and the MACD has given a buy signal (d).

So - the currency situation really hasn't changed. Technical indicators say the securities want to reverse, but we're still waiting for a fundamental catalyst to complete the reversal.

In the equity markets, notice that price action has really stayed in a pretty narrow range for the last 10 days.

On the daily chart, notice that money really hasn't left the market (a) and the CMF hasn't really moved negative in a big way (b). Also note the MACD has given a buy signal (c). While the longer trends are still negative (the 20 and 50 day EMAs are moving lower) the 10 day EMA has moved higher (e). Finally, notice some of the large candles within the sell-off (d) indicating there is a tremendous "buy on the dip mentality" going on.

In the Treasury market, I've been working on the thesis that prices formed an island reversal (a) and are now going to move lower as the safety bid leaves the market. That still appears to be happening, as also indicated by the declining A/D and CMF (c and d) and the sell signal given by the MACD (e).

The daily chart shows the island reversal area in a clearer light (a), but also shows that prices have been in a fairly tight range for the last few days (b).

The 5-minute GLD charts shows a strong uptrend (b) with several gaps higher (a).

But on the daily chart, notice weakness of the bars printed over the last few weeks (a) -- they're smaller and tighter. Also note that the A/D line (d) is advancing at a lower angle and the CMF (b) and MACD (d) are both in a sell position.