Unfortunately, the reality of war has had an impact on the financial and commodity markets around the world. After a truly stunning surge in the U.S. currency and equity markets and declines in commodities, some of the action is being reversed based upon the war related news over the weekend.
The perception Friday was that Saddam was near death, had zero control and all Iraqi troops were going to welcome our incursion with open arms. Those perceptions led to the largest one-week gain in 20 years. Obviously, some of that perception is being reversed in the early going this week.
I figured today would be a good time to review the charts to see if there is any difference between the perception and reality of the equity market and various indices. Basically, all day Thursday and Friday I was wondering what I was missing. I wanted to use the weekend to review everything to see if there really was a trend change, or if the recent action was still in context of primary trend. I came to the following conclusions:
As you all know, I have not changed much in my intermediate-term view of the market, which is based off the many indicators that I track and the weekly chart patterns. I never imagined that the markets could experience this kind of rally without getting to an oversold condition that has preceded almost every intermediate-term rally I have ever seen. The fact is though, it did happen and what could it change or mean?
As the chart of the S&P 500 (SPX) shows, the downtrend remains intact based upon the lower highs. It is important however to note that the SPX has also not made a lower low on the decline that ended so abruptly just over a week ago.
While I am not sure if it ultimately makes a difference, the potential for a trading range environment should also not be ignored. The bottom line is that even if I assume that the market is undergoing the bottoming process, I would be hard pressed to chase stocks as the SPX approaches the upper end of the range while in a well-defined downtrend. My view may change as the market works off the near-term overbought and pulls back toward the center of the range. Some of the pull back is going to happen at the opening.
Despite the dramatic decline in the price of gold over the past few weeks, the market has simply pulled back to its primary trend line - which remains positive. I found this hard to believe because the decline seemed so dramatic. Then I had to remember that historically, the sharpest rallies come in bear markets and the nastiest declines emerge in bull markets. From what I can tell, Gold remains in a bull market.
Oil prices seem to mirror the move in Gold, with one minor exception. Clearly, there is the perception that the commodity is going to replay 1991. While the correction has been severe and the price is closer to breaking the uptrend line, oil is not exactly in a bear trend. The key is whether it makes a lower low vs. simply breaking a trend line, which has not yet happened. Clearly, breaking the trendline could be an early heads up.
The Euro vs. the Dollar
If it takes a lower low to change a trend, can you imagine the market reaction if the Euro moved to below 97?. It would take that kind of move to change the bull trend here. These are indeed unique times. So far the bull trend remains intact.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter