WEEKLY COMMENTARY - AUGUST 11th-15th

MARKET COMMENTS -- INDU 11,734.32, COMP 2,414.10, SPX 1,296.31

The major indices are currently in a secondary reaction rally, coming off of short-term oversold levels. However, the rallies themselves are moving on weaker volume compared to the capitulatory volume seen during the recent sell off. This is cause for concern since low-to-average volume on a pullback in a downtrend is considered bearish. Other points of warning are the resistance levels indicated at the 50-day MA as well as the January and March lows for the DJIA and SPX. The COMP is performing the best as the index has tested its March lows in addition to penetrating the 50-day MA. However, all three are subject to a test at the upcoming 200-day MA, which has acted as resistance in May.

The MACD does not yet indicate any negative divergence to suggest that the rally may end. The current rally is in a confirmed uptrend. The stochastics, having jumped from a near oversold level of 20 to a near overbought level of 80 in one week suggests that the move has occurred to fast in too short of a timeframe. Traders should especially watch if the rally loses momentum and the stochastics are returning to the median value at 50. Any instrument is deemed to be overbought once the RSI reaches the 70 level. This level has not been breached by the major indices; however, they are all approaching that level. Be aware of these indicators to determine if a divergence has occurred or to confirm a reversal in the current trend. (Click on charts to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmont Washington. All Rights Reserved.

We ultimately expect the rally to exhibit the characteristics of a secondary reaction in a primary leg down. Since the primary trend is down, this is considered a counter-trend move. It is no doubt that the recent SEC announcement on naked short-selling helped provide the fuel to spike a rally. However, due to lower volume on a weak rally, there appears to be less conviction in serious buyers. The VIX indicator shows that the general level of fear has subsided with a minor support level at 18, and a major support level at 16. In addition, the INDU, COMP, and SPX are all facing numerous resistance levels at both the major moving averages as well as previous lows. This may be a difficult rally for the bulls.

For the short-term, both the INDU and the SPX formed ascending triangle patterns, both of which broke out to the upside on weak volume. The COMP continues to breakout, but again, also on weak volume. This indicates that the buyers are still not yet convinced of the rally. Many buyers who incorrectly bought during the last short-lived rally fit into this category. There is still upside potential, however, the risk are greater due to the fact that the rally has reached a later stage near major resistance levels.

Emphasized are the Advance-Decline lines and the New Highs-New Lows lines for the NYSE and the NASDAQ (COMP). The best clues come from any divergences from the indices. The most interesting divergence occurs with the COMP and their respective A-D and H-L lines. Even though the COMP is the best performing index, the individual issues as a whole do not show the same support. What these lines reflect are far significant than what the index is saying and that any buying must be done so cautiously. (Click on charts to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmont Washington. All Rights Reserved.

THE US DOLLAR, GOLD/SILVER, OIL/NATURAL GAS, AGRICULTURE, INTEREST RATES

(Click on charts to enlarge)

All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmont Washington. All Rights Reserved.

The US Dollar has shown many positives as the USD Index has not only broken through major resistance at the 200-day and the Nov/Jan lows, but has broken out to a new 5-month short-term high. As the USD re-enters into congestion, we expect either a false breakout and a return into the 71-74 range OR a pullback to the 74-75 range, where the USD will most likely make a new high. The short-term trend is bullish. The intermediate trend is in a neutral range, and the long-term trend is bearish.

Both gold (AMEX: IAU) and silver (AMEX: SLV) are still in a trading range, consolidating for many months. Currently, both commodities ETFs have penetrated the 200-day MA. Gold is testing major support at 85, while silver has already broken down vis breakaway gap, by violating major support at 16. It is likely that gold will follow suit.

A divergence can be seen between oil (AMEX: USO) and natural gas (AMEX: UNG). It is extremely likely that oil will follow in natural gas’ footsteps due to the definite break in the uptrend in the same period. The USO has broken the 40-day MA (not shown), which it followed religiously, the 50-day MA, and is nearing support at the 200-day MA. We expect a bounce of unknown magnitude due to the oversold indication of oil. However, it is clear that the trend is broken and the primary trend has reversed to the downside. The UNG, in classic bubble fashion, saw a precipitous decline about 70% faster than at the rate at which it climbed. We believe that the UNG will trade in a range following removing the excesses that started at the beginning on 2008. Both oil and natural gas are bearish in the short-term, neutral-to-bearish in the intermediate-term.

Agricultural commodities (AMEX: DBA), as a whole, are in the early stages of a downtrend. After trading in a range, the DBA reached the Feb high level, and broke down back into the range as well as breaking the 200-day MA. We expect to see a pullback rally exiting the oversold area and resuming its downtrend. The next support level is at around 30. At the failure at that level, there are no other major support levels remaining down to the 24 level.

Both the 30-year and the 10-year Treasury yields have been consolidating below resistance and are currently trading in a range. The fact that both yields were unable to break above the June high gives weight to the likelihood that both yields have started a downtrend. We expect continued whipsawing around the 200-day MA for both yields.

SELECTED INTERNATIONAL MARKETS

Brazil (NYSE: EWZ) has been in a long uptrend until the trend broke as it broke through the 200-day MA. In addition, a lack of follow-through in pushing itself back up above the 200-day confirms that a reversal has taken place. We expect the EWZ to enter into a downtrend or trade in a neutral range for several months. The same may be true for Hong Kong (NYSE:EWH) as it is currently in a consolidation phase, testing both support and resistance. A break above 17 indicates a bullish breakout while a break to 15 indicates a bearish breakdown.

(Click on charts to enlarge)


All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmont Washington. All Rights Reserved.

Japan (NYSE: EWJ) has currently broken support between the 11.50-11.75 level. We expect Japan to continue in its downtrend OR pullback and trade in a neutral range. We expect Mexico to breakdown below 52 immediately. The current consolidation pattern highly favors a continuation downward. Any break above 56 indicates a bullish breakout while a break to 51 indicates a bearish breakdown.

SELECTED INDUSTRY GROUPS

(Click on charts to enlarge)




All Charts Courtesy of Stockcharts.com. Copyright ©1999-2008 by StockCharts.com Inc., Redmont Washington. All Rights Reserved.

This Week’s Watch:

• The market and its industry groups will test the 50-day and/or the 200-day MA. Note successful and failed tests.
• Note any increases in volume (if any) on positive days during the current rally.
• Note any additional divergences between the indices and the Advance-Decline and New Highs-New Lows lines.
• Expect the US Dollar to maintain an uptrend.
• Expect agricultural and energy commodities to continue its downtrend.

Economic Reports of interest: Tues. (Trade Deficit, IBD/TIPP Economic Optimism, Monthly Budget Statement, Retail Sales), Wed. (MBA Mortgage Applications, EIA Energy Inventory, Import Price Index, Advance Retail Sales, Business Inventories), Thurs. (CPI, Initial Jobless Claims), Fri. (Empire Manufacturing, Net Long-term TIC Flows, Industrial Production, Capacity Utilization, Univ. of Mich. Consumer Confidence).

Noteworthy Earnings Reports: Mon. (CNO, SYY, CPN, COO, FLR, MDR, CUZ, CKEC, NUAN), Tues. (BE, TJX, BOBE, NVDA, AMAT), Wed. (LIZ, DPS, NTAP, IPI, DE, M), Thurs. (URBN, RRGB, KSS, A, EL, SJM, WMT, JWN, DV, BGG, ADSK), Fri. (ANF, JCP).

To request additional research, please contact the author personally at: JCLee84@hotmail.com.