Monday, March 12, 2012

Morning Market Analysis

As a review, my central thesis of the market is that we're technically overbought.  As such, the equity markets are looking at a period of correction or sideways consolidation (we don't know which yet).  Either way, that means we need to be on the lookout for technically important levels to support the market and be wary of the time when prices move through these levels.  We also need to look at other markets (like the treasury market) as these either provide a safe haven refuge for traders or a source of further fuel for a future rally.

Let's start with why I think the market is overbought:

In both the S&P 500 and NASDAQ 1000, over 80% of all stocks are over the 200 day EMA.  While that does indicate we're in a bull market, it also indicates we've probably seen plenty of gains and that traders are now looking for profits.

The IWMs represent riskier stocks, so they should be the first to gain when it looks like the economy is picking and and the first to fall when traders are concerned.  Prices have fallen through short-term support at ~81.  We have short term support at the 10 and 20 week EMAs -- both of which are still rising.  The MACD is still positive, although it is now moving sideways.  The A/D and CMF show money is still flowing into the market.

The QQQs are the best looking market, technically.  However, last week, prices printed a "hanging man" candle, which many traders consider to be a reversal bar.  However, all the technicals are also still positive here.

The SPYs have broken through resistance and are still heading higher.  However, last week the weekly chart printed a hanging man pattern (see above).  But, all the other technical indicators are still positive -- the EMAs are moving higher, the MACD is positive and rising and the volume indicators show money is flowing into the market.

None of the weekly charts are bearish.  The least bullish are the IWMs, but that charts underlying technicals are good.

The top chart is the IWM daily chart, which shows that prices broke support, hit the 50 day EMA and rallied.  The lower chart shows that prices rallied through Fib levels last week, but fell back to the 61.8% level by Friday's close.

The treasury market is still either above support or in a trading range.  This is important because this is where the safe money is resting.

While the dollar rallied last wee, the real trading pattern is that it's currently trading around the 200 day EMA.  On one hand, the more bullish US data is feeding the bulls, but the fed's stance is feeding the bears.

So, we're in a continuation of last week.  Stocks are selling off, but we are hardly in a danger position.  New cash is needed, but the treasury market isn't going to provide it.