S&P 500 chart analysis

S&P 500 has to be able to go out of the rising wedge formation to make me feel bullish.

Bond Breaks Down from 3 Month Up Trend, Commodities Tops Out

Today's themes are:

• 30 year US Treasury Bond broke steep up trend since early April, this confirms S&P 500's break out from its April downtrend last Thursday.
• Commodities (CRB index) formed a key outside reversal indicating a short term pull back will follow.

Monthly Intraday Chart for 2010 July

This is the first of a series for those who need intra-day charts but do not have access to such data, as intra-day data reveal important clues of market behavior which could not be found out in daily charts.

Without mentioning afterwards, all charts are courtesy of Google Finance

S&P 500

Shanghai

S&P 500 chart and scenario analysis

S&P 500 has been trading in up and down channels since last year.  Green line is one of the scenarios I can think of for next couple of weeks.  This is not the only one though!

UNG 3 year chart compared to SPX 5 day chart

What's the similarity between 3 year chart of United States Natural Gas (UNG) and 5 day chart of S&P 500 (SPX)?  Their shapes!

3 year chart of UNG

5 day chart of SPX

SPX went through a bowl shaped bottom in last 5 days, UNG is about to finish 50% of very similar bowl shape bottom, the difference is that the time spent by UNG for less than 50% of its bottom is 2 years, while SPX 5 days to finish its bottom.

Implication: UNG may hit $60 in 2 years, sometime in 2012! 10 times current price in 2 years.

In my gut feeling, even though UNG has hit its bottom (indicated by higher low pattern, flattening rate of change, rising 50 dma), natural gas price may still be bound to hit last year low again later this year before it really bottoms.

US indexes broke down trend

Today SPX, COMPQ and DJIA all broke down trend since April 23rd, this is in my opinion, significant development.  We will wait and see whether this indeed is start of a new trend.

US 30 yr T-bond and US Dollar chart analysis

US 30 yr T-bond

US Dollar

US 30 year T-bond is showing some signs of bearish divergence: higher high on price, lower highs on PPO, yet no similar bearish wedge is forming as US Dollar did recently.  Until its upward trend line is broken, US stock market will stay down.

GLD 6 year chart analysis

2006-2008

2007-2010

Staring at the above two charts, gold's long term bullish trend took stairs up pattern, simply the facts:

• From June 2006 to March 2008, in about 18 months, GLD was up about 80% from 55 to 100
• From March 2008 to Nov 2008, in 8 months, GLD clawed back about 61.8% of its gain and went back to 70
• From Nov 2008 to June 2010, in about 18 months, GLD was up about 76% from 70 to 123

Now comes to the forecast, if history will repeat itself, GLD will retrace 61.8% of the previous 18 month gain to $90 around Feb 2011.

In addition to GLD, a couple of ETFs to consider:

• PowerShares DB Gold Double Long ETN (DGP) - short sale not allowed
• PowerShares DB Gold Short ETN (DGZ) - short sale not allowed
• PowerShares DB Gold Double Short ETN (DZZ) - short sale not allowed

Focus on Long Term Treasury Bond (TLT)

TLT is back at end of June levels while S&P is rallied higher 7%+ from end of June level.  TLT is back because 98-99 was a support level, TLT is bouncing from that level.   Interestingly, this time, risk assets this time did not follow the bond market action, at least for now. 

Gut feeling is that TLT will make a lower high this time.

A Few Warning Signals of a Pull Back

Despite late day bounce of stocks, here are a few warning signals for an immediate pull back of risk assets:

• VIX has built some footing on 200 DMA and reversed its downward course
• 30 and 10 year bond rallied today, and their yield dropped
• Crude Oil finished down today
• Shanghai index is consolidating
• European indexes dropped today

When Technical Conflicts with Fundamental: Case Study of CSX

Yesterday CSX released strong Q2 earning report, which kicked start Q2 earning season with positive note, the result was more positive than Alcoa did.  Despite the stock market gained broadly today, CSX stock posted a 1%+ decline on 200%+ of average volume, and from chart perspective, today's CSX action formed an outside key reversal candle pattern, this pattern comes after 4 days of continuous rally.  According to technical analysis text book, this pattern signals reversal of bullish trend and start of bearish trend.  While the prediction from technical perspective can be true, we cannot rule out an alternative explanation from WSJ: today's decline was because increased appetite for risk assets drove investors to get out of relatively low risk railroad sector and move to more risky sector.

My gut feeling is that prediction from fundamental perspective has better chance to be correct. 

Study of 1998 and 2010 US Market Corrections

Studying 1998 correction using S&P 500.  The correction started July 20, 1998 at 1190.58, ended on Oct. 8th, at 923.32, the drop was 22.4%.  The correction lasted 80 calendar days.  The theme associated with the correction was Russian financial crisis and investors' flight to safety.  The correction was preceded by 2 years of bull market gain of 89% without a more than 10% correction.  The market rose from 626.65 on July 24, 1996 to 1184.1 on July 20, 1998 on closing basis.  After the correction, the market rose 29% in less than 2 months with 10 DMA as trend line.

Take a look at bull market from March 2009 to April 2010, in 13.5 months, S&P gained 80% from 667 on March 9, 2009 to 1217 on April 23, 2010 without more than 10% correction.  The theme with this correction was European debt crisis and investors' flight to safety.  So far, this correction looks like 1998 one.

Gold's Huge Move implies flight to risk

Today Gold moved down 4% while US dollar moved down as well, this on the surface seems bizarre, however, Euro broke to the upside forcefully, this confirms that investors are moving away from gold and starting to seek risk assets.  I am expecting a significant stock market rebound on US markets soon.