Our nestor and trading guru Larry Pesavento has sent me this market analysis for the coming week. I have not attached the charts that are mentioned in the newsletter below. If you want to subscribe to Larry’s daily newsletter and charts and educational videos, then please contact us via the contact form.
A trip down memory lane!
One of the news letters that I read each week comes from my friend Ed Carlson from the Seattle technician advisors. You can reach Ed at www.Seattletechnicaladvisors.com.
This letter focuses on the work of Charles Lindsay who is famous for his “three peaks in a domed house pattern”. Charles was famous during the 1960s 70s and 80s on Wall Street. Ed Carlson resurrected his fine works in his book about Lindsay’s life and methods.
Over the past several months specifically since July there has been a slow deterioration in the stock market. This past week may have seen the culmination of this deterioration just proceeding a sharp correction. With the Dow Jones, S&P 500 making new highs there were actually more new lows being made on the New York Stock Exchange then were new highs.
This can be seen on the enclosed chart where you see the four circled areas each portending a stock market drop which in fact it happen. I was very fortunate to know the gentleman who named this signal the Titanic signal.
Bill Obama was a Japanese-American technician who lived in Southern California during the time that I was in Los Angeles i.e. 1960s and 1980s. Bill did his work long before there were any fancy computers or indicators. It was a pioneer! We used to meet at monthly meetings where technicians would get together and discuss their methods.
This indicators showing that although the 30 stocks in the Dow Jones and some of the 500 stocks in the S&P 500 are making new highs this is not what is actually happening in the stock market. Even the NASDAQ was unable to make a new high this week.
There is a lot more selling going on the stock market that our financial press would like us to believe. Stocks making more new lows than new highs is a very bearish indication. The exact opposite was happening when the market was making a bottom. There were less new lows as the market was going lower indicating that selling was drying up.
Records in the stock market are being broken each day as what one would expect as new highs continue. These charts certainly show the momentum is beginning to wane. The New York Stock Exchange index for the third time in the last six months is showing divergence by not making a new high. The triple top is now in place! The Russell 2000 w has also been unable to make a new high. The VIX index of volatility is also approaching new low ground as it broke below 12 this past week forming a small three drive to the bottom pattern very similar to what occurred near the July high in stocks.
Treasury bonds and treasury notes completed a 38.2% rally of the previous high and then proceeded to break sharply. A strong indication that interest rates are ready to go higher. Quantitative easing should be coming to an end as the Federal Reserve Board has no other excuse for this program as they have seen the reports that the unemployment rate is now dropping down to a normal rate of 5.8%. Anyone who believes this rate should do so at their own risk. These unemployment numbers are massaged to make them look the best they possibly can much like they do with the inflation numbers. But these are the numbers that we live and die by each month.
The dollar yen cross rate closed above the 121 level shattering the 61% retracement level from the 1998 high. The euro, British pound, Australian Dollar, all look like they want to go to lower levels as the trend is so strongly to the downside which has been the case for the past weeks and months. The Russian Ruble which is very thinly traded has been in a catastrophic parabolic move to the downside and their currency has collapsed with lower oil prices imminent.
Gold and silver have held most of their gains from the previous week’s lows but were unable to bring any new buyers into the market as was shown by the open interest figures from the CME. When no open interest occurs as markets go higher it usually means short covering which makes the market susceptible to lower lows. This is a condition that we have in the market at this time. Last week reported on the low in silver at $14 per ounce which was a three drive to the bottom pattern on the long-term weekly charts. My friend Bart did a great job predicting that low months in advance. Silver has continued to hold these gains! Gold must hold above $1130 an ounce if it is to remain bullish. .
Crude oil is held up above the 61% retracement at $64 a barrel this past week. However, the heating oil and gasoline futures continue to break down below the key fib numbers shown on the enclosed charts. It will be difficult for crude oil to hold up much longer without some buying going in to the by-products of crude oil! Trading below $64 a barrel will cause more pressure to the Russian Ruble that is already in great distress.
International markets continue to higher as the German DAX index was able to make new highs very close to completing an ABCD pattern. Japanese stocks continued higher and are approaching five-year highs but still in a very long term bear market. Even the Chinese market was able to move sharply higher this past week i.e. 9.6% as shown by the Shanghai index.
This brings us to an interesting subject which is how the markets react to the ETF’s that they are supposed to mimic. As you can see by the enclosed chart the ETF for the Japanese Dow EW J is done very poorly as compared to the Nikkei Dow itself. This would frankly scare the hell out of me if I were long this ETF. What is it going to take to get it to go higher if it’s not following what is actually going higher?
The same can be said about the Chinese ETS X FI which is also lagging badly behind the Chinese market shares. One should really study the basis of these ETF’s before going into them as many of them have certain caveats that you need to be aware of before entering.
Thank you Larry