Sunday, November 7, 2010

Yesterday's Market

The QQQQs have been leading the way higher for some time. Notice they broke through key resistance in mid-October.

Last week, the SPYs broke through key resistance (a) as well.

And while the IWMs are still below key resistance, last week they gapped higher (a) which is always an important technical event.

In short, the combination of QEII and a spate of good economic reports moved the market higher.

Looking at last week's five minute price action, prices dropped on Monday, but consolidated in a pretty tight range for most of Tuesday and Wednesday (b). There was increased volatility after the Fed's decision (c). But the real move came Thursday AM with a big gap higher (d) and a continued move higher (e) for the rest of the day. Prices moved sideways on Friday, consolidating gains (f).

Taking a closer look at the dollar, notice prices are in a classic down, up, down, up, down, pattern.

The technical indicators underneath -- the A/D line, CMF line and MACD all indicated prices are going to reverse. But the question then becomes will this be a reverse of the overall downward trend of the last 6 months, or a chance to look for a good position to short overall? The answer I believe is the latter. First, consider the overall macro situation -- the Fed is engaging in QEII which has obvious negative consequences for the dollar. In addition, notice the EMAs are incredibly bearish -- the shorter EMAs are below the longer EMAs, all are heading lower and prices are below the EMAs. This tells us the trend in all major time frames (short, intermediate and long) is down. This obviously has bullish implications for commodities.

The long-end of the Treasury market is in a downward sloping pennant pattern (a). also note the shorter EMAs are becoming more and more bearish -- the shorter are below the longer and all are moving lower. Finally, prices are clustering around the 200 day EMA -- the demarcation line between bull and bear market.