Intermarket Analysis 5/14/12

Ok so it's been awhile since I posted last...January to be exact.   That being said I'm going look at yearly charts for this intermarket analysis to capture the overall trends, and avoid making grand claims on just a small snapshot of the market conditions.

With a stroke of luck the yearly charts actually show some nice correlations:

The $DX_F had paused from its earlier uptrend, forming what is proving to be a continuation wedge.   The 10 year note has also broken out of range and appears to be starting a new uptrend.  Commodities have also broken range and appear to have started a new downtrend.  The trend correlation between these 3 markets is...nice it's as we'd expect.  The $SPX has been separate from conventional expectations as I've highlighted in many posts, but in recent posts I've noted that it seems to be coming back into relation with the other 3.  It appears to be continuing this trend.  It too has paused but it has yet to make a decisive move out of the potential range that has been forming since February.

Now lets get to the interesting stuff.  Looking at the arrows I've labeled the charts with one thing pops out at me.  The 10 year note is clearly leading the $DX_F and commodities into trends.  In August the 10 year notes begins a range bound period, commodities and the DX follow suit but only after a delay of September and November respectively.  The 10 year note again led recently, busting out of range (a potential continuation flag) to start what appears to be a new uptrend (to new to be 100% sure).  The $DX_F followed not long after, breaking out of what appears now to be a continuation flag.  Even more recent is commodities breaking through support and starting a potential, but really really new downtrend.

The $SPX in all of this joined the party even later starting a range around February.

Expectations:

I'm going to watch the 10 year note and DX closely.  I plan on going short in commodities ($DJP) and maybe some small long positions in the $DX_F and $ZN_F.  Based of this analysis I'd expect all three to continue trending in their respect directions.

I've held back using this analysis too much to open positions in the $SPX, but one would expect the $SPX to range for a while and eventually break out long.  Europe may have other plans, my expectations are only based on the charts right now.  Considering European Dooms Day headlines I'd say this chart doesn't give me much reason to go any direction in the equities market (although my gut is screaming short baby!)  I do plan on updating myself with a deeper understanding of the current events, other than the short daily glances at the WSJ.

2012 Jan 02 SPX Technical Analysis

The $SPX has experienced an uptrend since it's low on 10/4.   Since then it has retraced to the trend line only to bounce upward off of it twice.  There appears to be a decent level of resistance at 1270 which has been tested and failed 3 times.  This is forming a continuation wedge that does not have much time until it's apex.

Since crossing over the 50 day MA the 20 day MA has bounced off the 50 day MA twice and has recently crossed over the 200 day MA.  Look for added strength if the 50 day MA also crosses over the 200.  This move looks likely and could cause an upwards breakout of that wedge formation.

*daily chart

Another bullish factor is the McClellan Oscillator's current uptrend.  It is still above the trend line and recently crossed the zero line.  It is slightly overbought right now so I will be watching to see if the trend line holds as it retraces.

The Adv/Decl Issues line is also trending upwards and I will be watching to see if it can trend upwards past the zero line.  The Adv/Decl Volume does not seem to be exhibiting much of a trend but it should be noted that it has crossed below the zero line.  This is the only bearish sign so far in this analysis but it should be watched, particularly if other signals reverse.

Although I think Europe will continue to cause problems in the markets the short term looks bullish based off this analysis and Intermarket analysis.

2012 Jan 02 Intermarket Analysis

All trends have continued from the last analysis so no positions have changed.  

The $DX_F is trending upwards, it has pulled away from the trend line so I will be waiting for a return to the trend line before adding more to this postion.  The 10 year note has paused and seems to be forming a bullish wedge.  Even so the $ZN_F lead all markets into this trend so I will wait to see which way this one goes before making any radical moves.  The $DJP has retraced back to the trend line which I will take advantage of and add a small position to the current one.  The $SPX is still behaving as expected, which from my previous analysis is not the norm for the past few trends.

I'm not sure what has made the $SPX change it's trend relationship back but it could be a sign of strength.  Will definitely be watching this closely.

New Strategy - Intermarket Trading

After being MIA due to work/school commitments I'm back.  I've been watching the markets and I've taken 2 things away from the current trends.  First of all I primarily traded biotechs before the break but have notice this area is getting crazy crowded to the point that things are ultra manipulated and my edge just isn't there anymore.  Second in terms of general market conditions...Europe.  I love this topic right now and think there is amazing room to exploit it.  The Eurozone is screwed in my opinion with so many hurtles  to overcome with some many politicians in the way.  If you buy on days of "Eurozone fixed" headlines I think your a sucker, just my opinion.

So great I think your a sucker but how do I plan to exploit what I consider to be a high chance of Euro downtrends.  I will be using primarily ETFs, specifically $UUP and $FXE for Dollar and Euro, $DJP for commodities (maybe some $DBC but don't like high weight in energy), $TLT for US bond market, and $SPY for equities.  NOTE will not really heavily on $SPY as explained in my recent post on intermarket analysis (disjointed from historical trends with Dollar, Commodities and Bond markets, don't trust it right now and have more options with other markets).  NOTE:  All these ETFs have attractive commission ratios.

Recap from last analysis:

Most importantly though is that all markets seem to be close to violating their current trends. The dollar has paused and while the ZN has not, it is right at the trend line now so I'm choosing to watch this. It could be that the note is leading right now. In addition the $DJP or commodity measure is forming a wedge. The SPX is also approaching resistance if that is truly a downtrend since April (dotted trend). One could argue after this summers slide it's just range bound right now.

I'll be looking to see either the $DX_F, $ZN_F, or $DJP take the lead and enter the 2 that lag. You could risk that the $SPX will continue it's pattern of trending opposite the dollar and note, but one of these days it may just fall back into place.
So now about 2 weeks later lets look at whats happened.  6 month daily chart for $SPY, $DJP, $ZN_F, and $DX_F

The dollar has broken through the resistance (see above I considered it paused).  The 10 year note was leading in an uptrend and the dollar has joined the party.  To make it even sweeter the $DJP has broken down via that wedge painting a really nice relationship between the 3 markets.

Tomorrow I'll be entering even positions in $UUP (long), $DJP (short), and will look to add $TLT (long) once it retraces slightly back to the trend line.  All exits will be breaking of current trend lines.  In addition a small position in $FXE (short) just for gigs to see if my theory on the Eurozone holds water (if possible, not sure if you can borrow this).

Reality (DX, ZN, DJP) vs Equities (SPX)

Since the beginning of 2009 the dollar ($DX_F), the 10 year note ($ZN_F) and commodities ($DJP) have all followed expected intermarket relationships. The dollar and 10 year note tend to trend together, opposite that of commodities.

As you can see since the beginning of 2009 the series of trends in the dollar has gone downtrend, upptrend, downtrend.  The 10 year note has had the exact series of trends.  Commodities have done the opposite.

What about the equities market?  Things don't look so normal, the SPX trended upwards when the dollar was in a downtrend.  It then paused (I guess?) when the dollar turned upwards, only to begin a new uptrend when the dollar started a longterm downtrend.  For the record they should trend the same way (or so the intermarket theory says).

In general the dollar begins a trend and it should trickle into the bond markets, commodities and equities.  Often in that order, but it is not required to occur in that order.  Changes in trends in one market can be a signal of change to come in a market your interested in trading.

I'm not an economist so my interpretation of this should be taken with a grain of salt.

What I take home is that if you want to use intermarket analysis to trade, the SPX might not be your best choice.  I.E if you notice a break in trend in the dollar, the 10 year note or commodities might be your best bet if you can find a lag in the beginning of their trends.

Equity markets just seem rather volatile and unpredictable.  I've been busy with school but one thing I did catch in the papers is that as soon as one European country's debt problem is "ok"suckers will just right back in with ridiculous one day runs...only to find out the politician were just kidding or wait is that another country conveniently in trouble the next week????  Finding faith in the politicians in our own country is proving tough enough to stomach.

So whats going on right now?  Good question, been out of the game for 2 months so lets check it out.

At the end of April the dollar entered a range bound state until the beginning of September.  At the same time the bond market reversed trends and started to trend upwards.  Following suit the commodities began a downtrend at the same time.

The SPX? one could argue it began a downtrend, which would continue it's trend...of trending opposite to expectations.  But in all seriousness I'll have to take a closer look in my SPX column to decide what the hell is going on there.

Most importantly though is that all markets seem to be close to violating their current trends.  The dollar has paused and while the ZN has not, it is right at the trend line now so I'm choosing to watch this.  It could be that the note is leading right now.  In addition the $DJP or commodity measure is forming a wedge.  The SPX is also approaching resistance if that is truly a downtrend since April (dotted trend).  One could argue after this summers slide it's just range bound right now.

I'll be looking to see either the $DX_F, $ZN_F, or $DJP take the lead and enter the 2 that lag.  You could risk that the $SPX will continue it's pattern of trending opposite the dollar and note, but one of these days it may just fall back into place.

Market Average Comparison 9/27/11

Although I was very bearish at the beginning of the week, there has been some glimpses of hope with the disproving violation of the false bear flag (See SPX analysis)

My current opinion is a range bound market, not a continuation trend.  Let's  look to market average comparisons to see if we can get some direction.

This analysis is done since the August 7th bottom, as these are ratio lines and starting point has a big effect on the overall line.

There is still no divergence of the SPX and Dow 30, a bullish signal

The Russell 2000 aka the Troops is still lagging.  A slightly positive sign is since the largest gap between the SPX and Russell 2000 on August 22 it has begun to catch up.

Closer Look:


Nasdaq vs Russell 2000

Looking at the ratio line of the Nasdaq/Russell the ratio has reversed it's divergent trend and is heading back towards 0.  Look for this ratio to head towards 0 due to the Russell performing better, not the Nasdaq faltering.  This is a semi bullish signal, confirmed signal at the zero line.

Nasdaq (Tech) vs SPX (Broad Market)

Tech stocks are not leading the broad market, notice the ratio line at zero.  Generally techs leading the way is a bullish sign.  I will be looking for this relationship to develop.  Current ratio neutral signal.

SPX (Generals) vs Russell 2000 (Troops)

The SPX General's are currently outpacing the Russell 2000 Troops.  Ideally we would like to see these guys hand in hand.  Notice the breakup of the divergent trend and that the ratio line is heading towards the zero line.  Look for this to continue in this direction due to a strengthening Russell 2000.  This is a semi bullish signal, confirmed at the zero line.

Summary:


Look for the Russell 200 to strengthen and thus bring the Nasdaq/Russell and SPX/Russell back towards a zero ratio.  The troops need to catch up to the generals.  These trends have started to develop, they need to continue to generate bullish signals.

Also look for the Nasdaq (Tech) to take the lead over the SPX.

Economic Indicators - Week of 9/26

Monday


New Home Sales (Aug) - In line w/ expectations, although this is the 4th straight month of decline.

Tuesday


Consumer Confidence (Sept)- Increased slightly in September.

Case-Shiller 20-city Index (Jul)- -4.11% slightly above expectations

Wednesday


Durable Orders (Aug)

MBA Mortgage Index

Thursday


GDP (Q2) - 3rd estimate

Jobless Claims

Friday


Mich Sentiment (Sept) - Final

Chicago PMI (Sept)

PCE Prices (Aug)

Personal Spending (Aug)

Personal Income (Aug)


Summary


I'll be watching the Durable Goods orders report Wednesday.  With the recent wave of poor economic data a decrease would negate a positive report in July.