REVIEW OF 13-34 EMA COMBINATION -- DAILY COMBO TURNS POSITIVE -- WEEKLIES ALSO IMPROVE -- MONTHLY MACD HISTOGRAM SHOWS IMPROVEMENT -- UPSIDE TARGET IS A TEST OF 2009 HIGH BY MAY -- AUSTRALIAN DOLLAR RALLIES WITH COMMODITIES

DAILY EMA COMBO TURNS POSITIVE... I've received a number of requests to review the current position of the 13-34 exponential moving averages (EMAs). As you probably know, I place a lot of importance on that combination because of its strong track record over the years. I apply the 13-34 EMA combination to daily, weekly, and monthly charts. Let's start with the "daily" lines which measure the market's "short-term" trend. Chart 1 shows the 13 and 34 day moving average combination. For a short-term buy signal to occur, the 13-day (blue line) has to cross over the 34-day (red line). That short-term buy signal took place earlier in the week. But there's more. The black line below chart 1 plots the "spread" between the two EMA lines. [You can create that line by inserting 13,34,1 into the MACD indicator]. You can see a positive divergence taking place during March when the black line held above its October low (black arrow). [We've shown similar positive divergences in several other technical indicators]. More importantly, the black line has exceeded its January high and risen above the zero line for the first time since last May. [A crossing above the zero line by the black line coincides with a positive EMA crossing]. That's a sign that the current rebound has legs.

Chart 1

WEEKLY EMA LINES IMPROVE... Chart 2 plots the 13 and 34 "week" EMA combination. A major sell signal was given at the end of 2007 (red arrow) and correctly signaled the onset of the bear market. The weekly EMA lines are still negative. There are, however, some signs of improvement. The first is the ability of the S&P 500 to close above the 13-week EMA (blue circle). That's the first time it's done that since last May. The second sign of improvement can be seen in Chart 3. The black line measures the "spread" between the two weekly EMA lines. There again, a "positive divergence" is visible between October and March (uptrend line). That's not enough to issue a major buy signal. But it shows that downside momentum is diminishing. That's also how a potential bottoming process would be expected to start as the two EMA lines start to converge. Although a divergence by itself isn't enough to change a major trend, it is a wrning worth heeding. The downtrend line in late 2007 gave a negative divergence" as the market peaked on October 2007 (down arrow). The 34-week EMA coincides roughly with the January peak which has been my upside target for this rally.

Chart 2

Chart 3

MONTHLY EMA LINES ARE STILL DOWN... I've pointed out before that the monthly EMA combination is too slow to use for major trading signals. Chart 4 shows the 13-month EMA (blue line) crossing below the 34-month line (red line) in late 2008 which was about a year after the market peak. A much better indicator to use on monthly charts is the spread between the two EMAS which is the black line in Chart 5. You can see that major market turning points coincide with turns in the black line, with the last downturn taking place near the end of 2007. Unfortunately, the spread between the two monthly EMAs is still pointing down. That suggests caution in proclaiming a major bottom. An upturn in the monthly EMA spread is needed to confirm the more positive action on the weekly and daily charts.

Chart 4

Chart 5

MONTHLY MACD LINES SHOW SOME IMPROVEMENT... There is, however, one monthly indicator that is showing some improvement, and that's the monthly MACD histogram. You may recall that I've shown several positive divergences recently on the daily and weekly MACD lines (with both having turned positive). That won't mean much, however, unless we see some improvement in the monthly MACD numbers. And we are. Chart 6 applies monthly MACD lines to the S&P 500 over the last ten years. Major MACD crossings gave a sell signal in 2000, and buy signal in 2003, and a sell signal at the end of 2007. The monthly MACD lines are still negative. The improvement is showing up in the histogram bars which measure the "spread" between the MACD lines. Turns in the histogram bars precede MACD signals. Chart 6, for example, shows the histogram bars bottoming in 2001 which preceded the actual MACD buy signal by two years. A major bullish divergence in the histogram in 2002 marked the actual bottom. That was a long lead time. But an upturn in the monthly MACD histogram is how major bottoms start. Chart 7 compares the upturn in the monthly histogram bars during the first quarter to the S&P 500 (red line). Despite that improvement, it's going to take awhile for the monthly MACD lines to turn positive and signal a new bull market.

Chart 6

Chart 7

A MAY PEAK?... I've written here several times over the last month that my upside target for the S&P 500 is a challenge of its early 2009 peak. That would retrace 38% of its five-wave decline from last May and would still be within the confines of a bear market. I'm going to add a time target for that test today. In the past, I've used some cycle analysis to time potential peaks and troughs. The last decline from early January to early March lasted eight weeks. That allows for a similar advance from the mid-March bottom into May (we're halfway there). As you may be aware, the market often rallies into May (as it did last year) and weakens from there. My scenario calls for an eventual challenge of the January highs by May. That would also bring the S&P 500 closer to its 200-day moving average (red line) which would be formidable resistance. I would then expect a major selloff from there which should retrace all or most of the spring advance. What happens from there will tell us if the market is putting in a major bottom.

Chart 8

COMMODITY CURRENCIES GAIN ALONG WITH CHINA ... With the U.S. Dollar falling, commodity prices are rising (except for gold which is acting more like a currency than a commodity). Naturally, foreign currencies are rising. Commodity currencies are rising the fastest however which include the New Zealand and Australian Dollars. Chart 9 shows the Australian Dollar Currency Shares (FXA) moving up to challenge its January high and 200-day average. Commodities are getting a big boost from rising Chinese shares (China imports a lot of commodities). Chart 12 shows the FTSE/Xinhua China iShares (FXI) testing similar overhead resistance barriers. An upside breakout in Chinese iShares would give a big boost to global commodities. And commodity currencies like the Aussie.

Chart 9

Chart 10