S&P 500 CLOSES BACK ABOVE 12-MONTH EMA -- NASDAQ 12-MONTH RATE-OF-CHANGE TURNS NEGATIVE -- US DOLLAR INDEX BOUNCES OFF MAJOR SUPPORT LEVEL -- CRB INDEX BREAKS BELOW LONG-TERM TRENDLINE -- OIL MAINTAINS STRONG POSITIVE CORRELATION WITH S&P 500
S&P 500 CLOSES BACK ABOVE 12-MONTH EMA... Link for todays video. Today I am going to take a big step back and look at the monthly charts for the major intermarket assets: stocks, bonds, the Dollar, gold and oil. Chart 1 shows the S&P 500 with monthly candlesticks over the last 12 years. A 12-month exponential moving average captured the trends quite well the first 10 years, but some excess volatility produced at least one whipsaw the last two years. An uptrend is signaled when the monthly close is above the 12-month EMA, while a downtrend is triggered when the close is below. This system captured the 2001-2002 bear market, the 2003-2007 bull run and the 2008 bear market quite well. The S&P 500 crossed above the 12-month EMA in April 2009, but had a whipsaw in the summer of 2010. Another whipsaw could be in order now as the S&P 500 closed below the moving average in early August and then closed back above in October. So far the index is holding the 12-month EMA as we near the yearend. It would take a December close below 1243 to reverse this signal.
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Chart 1
The lower indicator window shows the Percent Price Oscillator (1,12,1) to verify crossovers. The PPO measures the percentage difference between two EMAs. This version shows the percentage difference between the 1-period EMA and the 12-period EMA. A 1-period EMA is the same as the close. Since we are using monthly prices, the 1-period EMA equals the monthly close. This indicator is positive when the 1-period EMA is greater than the 12-period EMA and negative otherwise. Notice that the PPO (1,12,1) has been just above the zero line since the October close. The second indicator window shows the 12-period Slope, which is the rise-over-run for a 12-period Linear Regression. It is sometimes helpful to use filters or other indicators to confirm moving average signals. The 12-period Slope usually turns a month or two after the moving average crossover, which means it can be used to confirm. Currently, the 12-period Slope as yet to confirm a bullish moving average cross in the index for mixed signals on the long-term situation. Keep in mind that you can read up on any these indicators in our ChartSchool
NASDAQ 12-MONTH RATE-OF-CHANGE TURNS NEGATIVE... The Nasdaq is a bit more volatile than the S&P 500, which means moving average crosses are more frequent and less valuable. In this case, it is better to use other indicators to identify the trend. While most chartists associate RSI and Rate-of-Change with momentum, these indicators can also be use to define the overall trend. Chartists simply need to establish bullish and bearish thresholds based on past patterns. Past performance does not guarantee future performance, but these signals can augment our analysis process. Chart 2 shows the Nasdaq crossing the 12-month EMA several times. Chartists would need to use a longer moving average or employ other indicators. I am opting for 12-month RSI and the 12-month Rate-of-Change with bullish and bearish thresholds. For RSI, a move above 55 is considered bullish and a move below 45 is considered bearish. For Rate-of-Change, the bullish threshold is +5% and the bearish threshold is -5%. These thresholds are just above/below the centerline. Using crosses above/below the centerlines results in too many signals and whipsaws. Placing these thresholds just above/below the centerline reduces signals and whipsaws.
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Chart 2
Using the Rate-of-Change/RSI combo, there have been three signals in the last ten years: two bullish and one bearish. The two bullish signals came a bit late because of the deep swoons in 2002 and 2008 (orange area). Nevertheless, the Nasdaq did experience solid gains after these signals. The lone bearish signal occurred in February 2008 and would have kept an investor out of the market during the second half of 2008. Currently, RSI has yet to cross below 45 and ROC has yet to break below -5%. However, both are dangerously close to breaking these key levels and we should watch these indicators heading into 2012.
US DOLLAR INDEX BOUNCES OFF MAJOR SUPPORT LEVEL... While the current advance in the US Dollar Index ($USD) looks impressive on the daily and weekly charts, the monthly chart shows the index still within a large trading range. Since 2008, the index has been stuck between support in the low 70s and resistance in the upper 80s. I myself am still a bit stuck in the 70s and 80s, but thats a different story. In any case, the index bounced off this support zone three times in the last four years. The current bounce has yet to equal the first two, which carried on to the resistance zone. I am expecting this bounce to reach resistance for two reasons. First, the 12-month Stochastic Oscillator is above 50 and rising (above its 3-period EMA or signal line). A cross back below the signal line and below 50 would be negative. The second reason focuses on the Euro, which accounts for over 50% of the US Dollar Index.
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Chart 3
Chart 4 shows the Euro Index ($XEU) with a series of lower lows and lower highs since 2008. This zigzag lower defines a clear downtrend with next support in the 120 area. This support zone stems from the lows extending all the way back to 2004. The 12-month Stochastic Oscillator confirms the current downswing as it trades below 50 and below its signal line. Only a move above the signal line and above 50 would alter my bearish outlook on the Euro.
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Chart 4
CRB INDEX BREAKS BELOW LONG-TERM TRENDLINE... Even though there have been brief periods of positive correlation, the CRB Index ($CRB) has been negatively correlated with the US Dollar Index for most of the last ten years. The indicator window in chart 5 shows the 12-month Correlation Coefficient for the two. There were three bounces into positive territory, but the indicator has spent the vast majority of the time in negative territory. Since late 2007, the Correlation Coefficient has been mostly below -.50. With a bullish outlook for the Dollar, this is negative for the CRB Index. On the price chart, the index broke the March 2009 trendline with a sharp decline in September. Commodity prices have firmed since this break, but we have yet to see any real strength. I am marking resistance at the October-November highs. A break above this level is needed to turn bullish on the CRB Index again.
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Chart 5
OIL MAINTAINS STRONG POSITIVE CORRELATION WITH S&P 500... The fate of oil is tied to the stock market, which is tied to the economy. Chart 6 shows Spot Light Crude ($WTIC) bottoming around $35 in late 2008 and early 2009, and then surging above 110 in early 2011. Crude has since pulled back, but remains in an uptrend since 2009. Spot Light Crude is currently trading around $100, which is below the April high. While it is possible that a lower high is forming, a full trend reversal would not occur unless there is a break below the 2011 lows ($75). The indicator window shows the Correlation Coefficient for oil and the S&P 500. This indicator has been above .75 the last three years, which shows exceptionally strong positive correlation. I would expect oil to maintain its uptrend as long as the S&P 500 and Nasdaq hold up. A breakdown in these two would be bearish for oil.
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Chart 6
GOLD BULLS FEAR A 2008 REDUX... Chart 7 shows Gold Spot ($GOLD) over the last ten years. Despite a harrowing decline the last four months, the ten-year trend is clearly up. In fact, this decline looks rather small over a ten-year horizon. It seems to me that gold bulls fear a repeat of 2008, when the Dollar surged and gold plunged around 30% from high to low. This, of course, was brought on by the financial crisis and the risk-off trade. Gold ultimately recovered, but we are now aware of golds Achilles heel. Another financial crisis in 2012 would trigger a surge in the Dollar and this could result in further downside for gold. Again, the Dollar holds an important key and is in an uptrend right now. A serious correction in gold would entail a move back to the 1200 area. Support here is confirmed by the blue trendline, the 61.80% retracement and broken resistance from the 2009 high. Keep an eye on those Italian bond auctions, the Euro and the Dollar as we head into 2012. Incidentally, Italy is having a bond action next week.
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Chart 7
TREASURY YIELDS REMAIN IN MAJOR DOWNTRENDS... Instead of looking at actual Treasury bonds, I am going to analyze the 10-year Treasury Yield ($TNX). Just keep in mind that Treasuries and yields are negatively correlated. Falling yields translate into rising prices for Treasury bonds and visa versa. Chart 8 shows the 10-year Treasury Yield ($TNX) within a clear falling price channel the last 20 years. Most recently, $TNX broke triangle support around 25 (2.5%) and moved below 20 (2.0%). Yields have been consolidating around 2% the last few months. This downtrend is valid as long as the triangle break holds. Moreover, a downtrend in yields is bearish for stocks and bullish for Treasuries. I am watching the 2.5% level going forward. At the very least, a move above this level is needed to show rising rates and selling pressure in Treasuries. This would signal a move towards risk-on and free up some money for stocks. It aint happened yet.
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Chart 8
The indicator window shows the 12-month Correlation Coefficient for the S&P 500 and 10-year Treasury Yield. The indicator has been a little volatile over the years so I added a 20-period moving average to smooth the data series. There was clearly a switch around 1999-2000 when the Correlation Coefficient moved from largely negative to largely positive. As John Murphy has noted in the Market Message and his book on intermarket analysis, this is when the world switch from an inflationary environment to a deflationary environment. Falling interest rates are bullish in an inflationary environment, but bearish in a deflationary environment. Johns book on intermarket analysis is compulsory reading as we head into 2012.
MERRY CHRISTMAS AND HAPPY HOLIDAYS!...
Chart 9
