Sep 16, 2007

The Big Picture

Perched at the Battle Lines

Hello TMM Members,

The bulls pulled things back nicely this week but stopped just short of breaking crucial minor resistance levels. There is a big fundamental event on Tuesday. 

Investors' reaction to that non-technical event is likely to break the stalemate one way or the other - at least that would be the hope of most traders, because the markets have largely been volatile within a relatively tight range for the past few weeks.

So, the battle lines are drawn; it remains to be seen whether the bull camp or the bear camp emerges as the ultimate winner.  

Now, let's take a look at market action seen over the past few days. We'll take a look at the daily charts first, and then the weeklies...

The daily chart of the S&P-500...

The bulls have had a nice week, but they still haven't been able to drive home the advantage. The S&P-500 now sits just a smidgen below a significant minor resistance zone between 1490 and 1500. The ramifications of a sustained move above this zone have been harped on time and again.

RSI is also up against a bit of resistance, but with MACD now showing a positive 0-line crossover, the odds of the rebound turning into a full-fledged minor-/intermediate-trend rally have grown.

If a breakout does occur, we'd need to watch the Upper Bollinger Band closely. That Band is trailed sideways, at a level just above current price action, for a few weeks now and it will have to curl upwards if the market is to rally further.

Early this week, we started talking about a potential inverted Head & Shoulder pattern on this index. By the end of the week, the pattern looks better, if anything. It is still incomplete, though, and requires a breaking of the mentioned resistance area in order to come fully into play. The target from the formation is in the range of 1600-1625.

The daily chart of the Dow Jones Industrial Average...

The Dow is sitting right at a minor resistance level that looks like the upper bound of a bull rectangle. A breakout above 13450 leaves a target of 13850, as per the potential pattern.

RSI is up against a bit of resistance as well. Once (if) that resistance is taken out, there could be a short spurt in the blue-chip index.

MACD has pushed into positive territory as well, and as long as it can stay above the 0-line, the markets might just be embarking upon its traditional year-end rally.

The daily chart of Nasdaq-100...

NDX traded along the lower line of what looks like a bull channel on the minor trend, this week. RSI and MACD are both trading above their centerlines and volumes are coming in an about average.

So, all in all, the bulls look like they are in control of this index as well. It would take a breaking of the bull channel and of the 20-day Moving Average to signal any trouble whatsoever for the bulls.

The daily chart of Nasdaq Composite...

COMP is showing a potential inverted Head & Shoulders formation, just as SPX is. Minor resistance (and the neckline of said pattern) lies at approximately 2630.

As long as RSI and MACD stay above their centerlines, it will only be a matter of time before the pattern is complete. If it is legitimate, the inverted H&S points at a move to the area between 2800 and 2850. 

The daily chart of the Russell 2000 Small Caps...

The Russell 2000 continues to meander in a range between 770 and 800. It is absolutely trendless and not much can be gathered from price action until or unless a move out of that range is seen.  

The daily chart of the S&P-100 Large Caps...

Another major index is showing a potential inverted Head & Shoulders pattern. That index is the S&P-100, shown above. A collective representation of some of the largest, optionable stocks, this index sits just below minor resistance - at 695-700. Any breakout above this level completes the formation and calls for a move to 750 or so. 

Speaking of optionable stocks, let's take a look at the action on the VIX. 

The daily chart of the Volatility Index...

Interestingly, the VIX is still trading at a rather high 25.0.

With the stock market's having apparently found its feet, one would perhaps have thought the VIX would be closer to 20 than 25.

The VIX is often referred to as the "investor fear gauge"; however, while being generally accurate, that classification might be overly simplistic.

The VIX is first and foremost a measurement of implied volatility on near-term S&P-500 index options. If you are a trader of the SPX options, you know that those options - and the underlying index - are still trading in a rather volatile manner on an intra-day basis.

Perhaps, that is what explains the current levels of the VIX. It might take a breakout above the crucial minor resistance level highlighted earlier on the SPX, in order to push the VIX down to more "normal" levels.

Now, a quick look at the weeklies...

The weekly chart of the S&P-500...

The SPX weekly chart continues to show a gently rising consolidation/base. Price continues to trade between the old and new (presumed) rising major trend lines.

RSI is yo-yoing either side of its centerline while MACD still hasn't even reached its 0-line. That last fact is reiterates that the market was highly overbought on the intermediate and major levels of trend, before the Jul-August sell-off.

The weekly chart of the Dow Jones Industrial Average...

The sanctity of the major trendline on the Dow has been maintained at week's close; early in the week prices were slightly below that line but they quickly found support from the lower Weekly Bollinger Band and rebounded. 

Weekly RSI has found support from its centerline once again, and MACD is trying to find support from the level of its April trough.

The weekly chart of Nasdaq-100...

As the chart shows, NDX is not very far away from new cyclical bull market highs. RSI is in between the centerline and overbought territory and MACD is attempting to reverse the negative MA crossover that was seen a couple of months ago.

The weekly chart of Nasdaq Composite...

COMP hasn't been able to rally as smoothly as NDX but the momentum on the major trend is still with the bulls. This is clearly evidenced by the fact that MACD is still well above its 0-line and RSI is starting to rise after testing its own centerline.

Having taken a look at the various stock market charts, let's take a look at the weekly charts of a couple of commodities and a currency index.

The weekly chart of Crude Oil...

Crude Oil has had a good year; it has rallied nearly 50% from its lows. Firmly within the grasp of a bull channel on the intermediate trend, the commodity is now sitting at major resistance just under 80. 

While it seems a foregone conclusion that there will be a breakout, it will be interesting to see if prices can stay above the broken resistance level (if there is a breaking) for too long before a correction of the Jan-present rally is seen.

There is a potential negative divergence playing out on MACD; oil traders will have to keep an eye on that development over the next few weeks.

The weekly chart of Gold...

Gold has had a humdrum year over all. While it has rallied over a $100 since Jan, it has done so in a choppy fashion.

The precious metal now resides near a significant resistance level - 725. The territory above this level is virtually uncharted. That level has provided resistance since the early 1980s and although the metal spiked to 875 back in 1980, it was for a very short period of time.

It would not be an overstatement to say that a move above 725 will be a massive development.

The weekly chart of the US Dollar Index...

USD broke below 81.0, which was actually a secular support level, in July, then found temporary support at 80.0 before making a minor peak at 82.0.

The currency index has broken that previous low of 80.0 this week and clearly continues to be within the grip of a major and cyclical (possibly even secular) downtrend.

That's it for this issue of The Big Picture. Before we wind off, here's...

A quick look at the recent progress of the Model Portfolio...

Enjoy the rest of the weekend and have a great trading week!

Sincerely,

Asher Pinto

www.TheMarketMessenger.com