Wednesday, February 15, 2012

Morning Market Analysis

Yesterday, prices opened lower and then formed a downward sloping channel for most of the trading session.  However, stocks rebounded strongly at the end of the trading session.

The 60 minutes chart really highlights the real trend.  Prices are essentially moving sideways, moving between the 134 and 135.5 level.  However, notice that prices continue to break support, indicating the bullish trend is a bit weaker than we would like.

The daily chart shows that for the last few trading sessions, prices have formed very weak candles.  While prices are still above resistance and over trend lines, the daily price action should be raising concerns.

The QQQs daily chart is a bit better -- that is, the candles are a bit larger and there is a slightly stronger trend.

But the IWMs are also weak.  More importantly, the MACD is currently giving a sell signal.  However,  the volume indicators are still strong.

I wanted to chabge gears to the FX market, where the yen has broken a nearly two year trend line.  The yen had been strong because of its demand in the carry trade (borrowing in low-interest markets and buying either higher yielding currencies (such as the Australian dollar) or more aggressively growing countries (like a BRIC) country.  But Japan recently printed a negative growth rate for the third time in four quarters, taking away even the carry trade appeal of this currency.

The above charts are for the German, French and British ETFs, respectively.   Notice that all three have stalled at previous highs. 

The above chart is from John Murphy of  He's also noticed the lack of rising treasury yields.  He explains the situation this way:

A number of intermarket linkages that have worked for years don't seem to be working in 2012. As a result, a number of intermarket divergences are showing up. One of them is the link between stocks and bond yields. Chart 1 compares the 10-Year T-Note Yield (green line) to the S&P 500 (black line) over the last two years. Prior to 2012, downturns in the bond yield hinted at economic weakness and eventually pulled stocks lower. That was especially true in the spring of 2010 and 2011 (see arrows). Since the start of 2012, however, the S&P 500 has rallied all the way to its 2011 high, while bond yields have stayed down (see trendlines). One of the reasons bond yields are staying down is that the Fed is buying long-term bonds. That appears to have distorted the more normal relationship between the two markets. If the stock rally is signalling economic strength, Treasury bond yields should be moving higher (and bond prices lower). The Fed's bond buying program (Operation Twist) ends in June which may keep bond yields down until then. It seems reasonable to expect the two markets to come back into closer alignment at some point. The Fed can't prevent markets from taking their natural course forever.

I think he's right to a point; the Fed is helping to put a floor under bond prices.  However, I still think that the safety trade is a big reason for this issue right now.

The fact the European markets have hit resistance adds to my concerns about the market.  Also notice the small candles we've seen on the daily charts and the lack of a treasury sell-off, and it looks like a correction is getting closer.

In order for that position to change, I'd need to see some strong upside moves in the equity markets.