S&P 500 13-WEEK EMA CROSSES ABOVE 34-WEEK EMA - REVIEWING 13-34 CROSSOVER - ADDING MOMENTUM WITH THE PERCENTAGE PRICE OSCILLATOR - INCREASING SIGNALS WITH DAILY CHARTS - GOLD FORMS LARGE TRIANGLE - DOLLAR REMAINS OVERSOLD

13-34 CROSSOVER FOR SPX... Link for todays video. A few readers inquired about the recent crossover in 13-week and 34-week exponential moving averages. John Murphy is the 13-34 specialist, but I can provide some insights until he returns. As the S&P 500 now stands (Thursday), the 13-week EMA crossed above the 34-week EMA for the first time since January 2008. We still have Friday trading to factor into the last data point. Prior to this cross, the 13-week EMA was below the 34-week EMA for over 18 months. That is one strong down trend. Trend is the key work because strong trends are required to make moving average systems viable. Moving average based systems will whipsaw if/when trading turns choppy. As you can see from chart 1, the S&P 500 trended higher from May 2003 until January 2007 (~55 months) and down from January 2008 until July 2009 (~18 months). These were extraordinarily long, and profitable, trends to follow.

Chart 1

The bottom indicator shows the Percentage Price Oscillator (13,34,9), which shows the percentage difference between two moving averages. Like MACD, the PPO turns trend following moving averages into momentum oscillators. As such, these indicators capture the best of both worlds: trend and momentum. The Percentage Price Oscillator turns positive when the shorter moving average (13-week) moves above the longer moving average (34-week). Conversely, the PPO turns negative when the 13-week moves below the 34-week. Even when the PPO is positive overall, it can still oscillate up and down. The thin blue line is the 9-day EMA of the Percentage Price Oscillator. It acts as a trigger line to define upturns and downturns. For reference, chart 2 shows the S&P 500 with both MACD (13,34,9) and the Percentage Price Oscillator (13,34,9). You can read more on these indicators in the chart school.

Chart 2

WAITING FOR DIPS... Chart 3 focuses on the five year bull run when the PPO stayed positive for over four years. Ideally, one would buy the bullish crossover in May 2003 and sell the bearish crossover in January 2008. While two decisions in five years would be great, the real world doesnt always work like that. In addition to big positive and negative crossovers, the Percentage Price Oscillator provides a means to identify pullbacks and trend resumptions. The initial surge off the March lows lasted around 9 months and carried the S&P 500 from 800 to 1150 (+31%). There was then a nine month pullback where the PPO moved back to the zero line. Also notice that the PPO moved below the signal line during this period. This is because the 13-week EMA was moving closer to the 34-week EMA. The PPO hits the zero line when the 13-week EMA equals the 34-week EMA. When the 13-week EMA turns up again, the PPO also turns up and moves above its signal line. This signals a resumption of the uptrend. The blue dotted lines show trend resumptions in 2004, 2005 and 2006.

Chart 3

A FRESH SIGNAL... With the 13-week EMA moving above the 34-week EMA, it is possible that a long-term uptrend is beginning. However, we are all too aware of overbought conditions currently. In addition, there is also the chance that this 13-34 crossover results in a whipsaw. The S&P 500 is up almost 50% in the last five months and 14% in the last four weeks. Even though these moves are testament to underlying strength, the odds of a pullback or consolidation remain high. Assuming this 13-34 week crossover signals the start of a long-term uptrend, it would then be prudent to turn to a shorter timeframe (daily) to identify pullbacks and potential entry points.

Chart 4

Chart 4 shows the S&P 500 with the 13-day EMA, 34-day EMA and Percentage Price Oscillator (13,34,9). A bullish signal occurred in mid July on the daily chart, but this occurred during a bearish period for the 13-34 week system. Now that the 13-34 week system is turning bullish, it may be time to look for pullbacks in the PPO on the daily chart. Daily charts provide more signals than weekly charts because of the shorter timeframe. More signals means more opportunities, but also more chances for whipsaws. It is a double-edge sword. A move back towards the zero line and a subsequent move above the signal line would be viewed as an uptrend resumption signal. With the PPO currently above 3.1%, it is going to be a few weeks (at least) before such a signal.

GOLD REMAINS RANGE BOUND... Chart 5 shows weekly prices for the Gold-Continuous Futures ($GOLD). A large inverse head-and-shoulders pattern remains in play with the right shoulder under construction. In fact, this right shoulder looks like a triangle as gold formed a lower high in early June and a higher low in early July. A break above triangle resistance would be hugely bullish. Conversely, a break below triangle support at 900 would be very bearish. The pink lines within the triangle show the swings. The current swing is up and an upside breakout is favored unless this swing reverses.

Chart 5

DOLLAR CONTINUES TO SINK... Gold and oil have been getting help from the Dollar over the last five weeks. Chart 6 shows the US Dollar Index ($USD) breaking below triangle support in July and moving below 78 this week. The index may be oversold, but it is just getting even more oversold. This it the opposite for stocks, which are overbought and just getting more overbought. A falling price channel is taking shape with the lower trendline extending to around 74. Support around 74 is also confirmed by broken resistance in 2008.

Chart 6