Good afternoon Slope. I hope everyone is enjoying the weekend wherever you may be. It continues to be a mild summer here in Tennessee, which has been an unexpected surprise. Let’s hope it continues one more month.
On to the markets… For U.S. equities I remain cautiously bullish for the short term, which I have been since the May-June downtrend line broke higher. For the intermediate/long term the Rev remains a bear’s bear. Let’s take a look at what’s going on.
Below is a chart of the Summation Index and McClellan Oscillator. It offers a mixed bag. The summation index continues to point higher, inferring dips should be bought. However there is a noticeable negative divergence that has formed on the McClellan Oscillator. This setup is somewhat similar to the week preceding the 5/22 top.
I continue to remain cautiously bullish on SPX for the short term. Notice that the downtrend line from the Wed-Fri swoon this week was broken to the upside on the Friday ramp. Temper that with the fact that SPY Money Machine is currently on a sell, but will break to the upside above 170.16 on Monday. With a FOMC announcement coming up this week, we’ve the potential for an interesting reversal to take place. The Federal Reserve and QE remain the key issue driving this market. Everything else is secondary. The last time we had a nice reversal was on 5/22 with Bernanke’s testimony. What I would prefer to see here is a rise next week into FOMC, an intraday spike higher, followed by a large reversal to the downside. That scenario could set off a nice reversal to the downside.
On 10 year yields, I’m looking for treasuries to selloff with equities again, as they did in May/June. However, as you can see on the chart below yields are showing a noticeable negative MACD divergence, which argues for a move back down to backtest the downtrend line it broke up from in June. I’d be looking for rates to move higher once that backtest happens, which would also argue for equites to move down at that point.
Our friends in Brazil are another reason I remain short term bullish. After a significant breakdown in June, EWZ formed a bottom in July accompanied by a positive MACD divergence. MACD continues to move higher, arguing for a continued push higher in EWZ to backtest its trendline shown. I’d be looking for a backtest of that line, MACD to begin to point lower, and a negative divergence to develop. When those 3 conditions are in place it will be time to aggressively short Brazil in a large way.
Two charts that should give the bears tremendous hope are the Nikkei and copper, both of which suffered noticeable breakdowns last week. Below is a chart of the /NKD, the futures market which tracks the Nikkei. First, of note, is the fact that the Nikkei failed to achieve a new high along with SPX, after its May-June swoon. This is an important negative divergence which sets the stage for a bear market. Also note, for most of June the Nikkei was trending higher while SPX was making lower lows. The reverse is now the case. /NKD formed a nice diamond top over the past couple weeks, and broke down out of that formation this week, moving down to test its uptrendline coming off the June low.
Finally, let’s take a look at copper. I had a lot of success this past week shorting copper at night, and covering in the morning. A look below at the chart of /HG, and you can see why. The four hour chart of /HG showed a nice negative MACD divergence, as well as a broken MACD uptrendline line. Copper is now moving down to test its uptrendline coming off the June low. Where we go from here will be interesting next week. Will we see a small bounce in copper, followed by a breakdown of the uptrendline? However we get there, I believe copper is heading down, which should point to slower global growth, and an eventual decline in equity prices.
Have a good rest of the weekend. The bear is on the verge of returning.