Top of the world - WMA 3 May 2010

TIP
Had a very bullish week. It broke a price action pattern and made dizzying highs. The MACD bullish divergence did happen and the TIPs look a little overbought, but still bullish. Weekly charts have at least another week of bullishness, although the daily charts are a overdone, indicating a short term pullback early in the week.

JNK
The coporate junk bonds did complete the 2 weeks of bullish up- close for the weekly charts and it is about ready for a correction based on bearish divergences. Similarly, the indicators for the daily charts are telling of a likely reversal with weak higher highs over the past week. The MACDH is getting a little messy and it may be the week of discernment for this.
HYG looks similar as well.

/HG
Copper did get a bashing week with a major reversal in prices. On the weekly, the bearish divergence looks yummy and already gaining momentum to equilibrate. The daily prices are a little extreme and should see a stall and more downside in the coming weeks. The open interest indicates a lot of shorting activity for copper… this does not bode well for the metal price although it has hit a support level.

I concluded a in my last analysis that according to the leading indicators (Napier’s), there seems to be indications that the market is toppy. Both JNK and especially HG already started the downleg and evening out the divergence. Furthermore, we had a weak spike that formed a lower high (LH) this week. I am a little miffed by the extreme TIP bullishness… and I do wonder has this anything to do inflation. With 2 out of three of the Napier’s leading indicators going bear, and TIP being bullish, I would wait to see if TIP can break and stay above 106.38, which I do not expect so at this point. Once TIP reverses, all the leading indicators should be telling us a very coherent picture.

/DX
The USD is gained ground basically due to the Euro losing ground. This affected Crude and other commodities, but surprisingly, not Gold. Something is up there… For the USD, it is due for a correction in the early part of this week, and should gain more ground later in the week. For this to happen, the Euro should be heading up with news that Greece is “stabilizing” by accepting the bailout package just on Sunday. An attempt was made to breakthough 82.06, but that proved to be a good resistance level. The USD should revisit the 81.40 support this week.

SPX
Over the last two weeks, there was the expected weak spike up, and then the past week was a very interesting week. It began with a high of 1219.8 and then fell 25 points the next day. This was followed by a recovery of at least 20 points over the next two days and Friday was a reversal of that, losing 20 points again. This is a top forming pattern. Weekly and daily charts are indicating the equilibration of the bearish divergence is in place.

2 weeks ago, I posted” The daily charts are just about ready to have a mild correction (expect 1160-1180) but I am expecting a lower high to form, perhaps the week after, with a small rally after the coming week’s correction only to fail at 1210.”
We got that alright… and moving forward, it should break past 1180 and end up much lower. Today’s news is showing a line-up of news that should just about ”align the stars”. Over the weekend, China increased the RRR of the banks further, and Asian markets reacted rather badly. Greece accepted the aid package and in response, the European markets did not view it with any good outcome nonetheless. That’s the news and global market reactions. Last Friday, the SPX posted a bearish engulfing pattern establishing a lower high on the daily charts. This has a couple of implications… that the next 2-3 days should see a follow through of down days, and if so, it would

Gold /GC
The weekly charts appear much more bullish than 2 weeks ago. And much more so for the next month at least, looking for 1350. The daily chart previously appeared to be bearish, but it just bounced off support and started taking off, making a bullish rally in Gold. Perhaps Greece and Euro paranoia accentuated Gold’s climb, and it is starting to be a little overbought in the daily charts. The open interest on Gold shows that there is inflow of money into gold. I would be bullish on Gold for the next two weeks or so, but I am expecting near term resistance at 1185, before a target of 1214 is achieved. The main strength in Gold is visual with rising Gold prices in the face of a rising USD (of which the USD is rising due to falling Euro).

Crude /CL
Crude did close way below 83, but bounced back up above 85. The correction appears to be completed and it is back to being overbought in the daily charts. The weekly charts indicate that there is still an uptrend, and appears to have a spike in crude prices for this week.

VIX
The VIX weekly charts are really showing that it is time for volatility to increase. The daily VIX charts are way off into the upper extremes and it can remain there for some time, although over the next week, it should moderate lower slightly before another rally. We should see more volatility in the weeks to come as well as this being one of the stars to align for a market reversal.

SYNOPSIS
I posted this the last time I did the WMA 2 weeks ago…” I am still expecting a small relief rally which should fail the last high, and this needs another 2-3 more shocking events (including the PIIGS which have been sidelined since mid last week).
Last week was the turnaround, and the coming week will seal it if it is to happen.”

Clearly, it happened. From many perspectives, this looks like a highly probably top. On the SPX there is a head & shoulders pattern, with a bearish engulfing on the weekly charts, while the oscillators are showing bearish divergences and are in the overbought territory. The VIX is supported nicely and has bullish divergence closing. The Euro is in trouble and China is restraining. Gold is also starting its rally, while crude is deciding. The Napier’s leading indicators are mostly leading bearish with TIPS making a beeline the opposite way. Once this turns around, it will get ugly.

Furthermore, it is May 2010. Early this year, every analyst decided that 1H10 would be bullish with 2H10 having downside correction. May holds the adage of “sell in May and go away”. Almost all the indicators/oscillators are in the overbought region, or just exiting it. Greece has a dateline (deadline) mid May for the EU/IMF funds to flow in, while we have not even seen/heard/read of anything really concrete to start the process of actually aiding Greece. This IMHO, is reminiscent of Lehman Bros pre-trigger in 2008. Whether or not this alignment of the stars actually starts the snowball rolling, remains to be seen… but in terms of probability, I know where I am.

Note: Any material posted here is of my sole opinion, and my opinion may differ from others. It is definitely NOT a solicitation to do anything else as a consequence of reading this material. The material presented here is intended for educational purposes only.