Stocks: Technical Update

I've been doing quite a few technical updates between Treasury Bonds (Article: Bonds: Is It Time To Short Treasuries?) and Silver (Article: Commodities: Silver Technicals), that I might as well do stocks. It seems that every single asset class these days has indecision triangles, similar to what Gold had only a week or two ago (Article: Commodities: Gold Technicals). Traders and investors do not know what will happen so the prices on the main indices are making a series of higher lows (bulls in control) and lower highs (bears in control).

The perfect example is the chart above, which shows the S&P 500 recently selling off from its resistance level of about 1,260 / 1,270 level. This was a previous support for the bull market prior to S&P downgrade in August. On top of that we have a series of lower highs as well as a 200 day moving average creating a cluster of resistance levels, which were too strong for bulls to break and so now we have another price sell off. This is also the third time 200 day moving average was not broken, so some analysts say that is a very bad sign.

These same analysts than point to the Shanghai Composite, and rightfully so, saying that Chinese stock market has recently broken down below July 2010 support. If the S&P 500 did the same thing, that would mean a break below 1,010. First, technically Chinese market is now extremely oversold (blue circles), so this is not the time to be a preacher more downside from here. Sometimes crashes occur from oversold levels, but crashes are not an everyday type of events so we might have a bounce here now, at least until the work off this oversold condition.

Second, Chinese equities have corrected much more than their US counterparts because Chinese Money Supply growth has collapsed to the lowest level in a decade, while the US Money Supply growth is at the highest level in at least 30 years. You see... Bernanke is much smarter than we think he is, or at least give him credit for. He is the true money printer, who relies on stupidity of retail investors, who mainly look at the nominal price of asset values. He understands that these investors have no chance again the printing press and "modified" CPI data, which always reads: "Core CPI stable".

I'm not so bearish on equities here, at least in the short term. If Shanghai does lead the world's stock markets, than it might start bottoming out in the coming days so I think the market could stage a rally for awhile. Having said that I wouldn't really buy equities or play this rally theme. On top of that, the chart above shows that recently NYSE Down Pressure got quite extreme again. Every time we had 80% of all points and volume move to the downside over the 3 days, we ended up staging at least a bit of a rally. Four time out of six, we actually put in an intermediate bottom using this indicator (red circle) and stage quite a decent rally of 5 to 10 percent. Maybe together with large mutual fund outflows in the last two weeks and large Put purchases as of yesterday, we might stage a bit of a rally here...