Is it "Hammer Time"?

                Today’s movement was further evidence that the world markets have intermingled to a point where everything moves in lockstep.  We opened moving down and hit that 1180 area before making an attempt to advance back to the until the Merkozy press conference yielded information that the market didn’t like.  We were expecting some kind of euro bond but were left disappointed.  After that disappointment we headed straight back to the 1180 area and then started moving back up towards even.  At about 3:15 we set up a bull channel on the 15 min chart and have been following that so far.

                We had yet another hammer set up today on the daily chart indicating a potential reversal (all reversal patterns require confirmation).  Confirmation would occur if we close tomorrow below that 1180 low we put in today.  I don’t think this is very likely.  Although the Di + turned sideways, the MACD and stochastic remain bullish for the short term.  I expect that we will move back up after people have shrugged off the Murkozy info and head to about 1210-1220 tomorrow before moving closer to the 20 day moving average or the neckline.

                Today we also have the S&P 500 bullish percent chart for you.  This is a very good indicator of reversals and “contra” trends (contra trends are short term reversals).  It called the reversal from our head and shoulder pattern and is showing a short term contra trend today.  This remains in bullish direction for the moment.  I expect that we will advance on this before reversing back to the long term trend at around the 25-30 area.

Important Pre-Market Update

                I need to revise what I said yesterday about what to expect from the market today.  The best way to do that is to refer you to Ron Walkers public chart list and his video for yesterday’s market.  You can find this chart and others at   http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1926808&cmd=show[s237471733]&disp=O  and his video for Monday August 15 at http://www.thechartpatterntrader.com/. 

                Basically we are going to see an extremely short term pullback from yesterdays close to the 1180 area before heading higher.  I believe that we are going to form what is called a head fake.  A head fake is where price pushes above a level of resistance, pulls back below it, and then pushes through it.  This is very common around moving averages.  I did not think this was going to happen but futures are implying that this is going to happen over the next couple of days.

                If you look at Mr. Walkers 60 min chart for yesterday he breaks down trend lines and other levels of resistance.  There is further explanation of these trends lines as well as other analysis that points to the 1180 area before we move higher.  The green marks on this chart are mine but the rest are  Ron’s.  I fully suggest that you visit his site http://www.thechartpatterntrader.com/ and help support his site as it is an excellent learning tool that I use daily in case I miss something like I did last night.

Du, Du, Du

                Finally got our confirmation today.  We rose from the start and after a short move down from the opening high we moved all the way up clearing multiple levels of resistance.  We cleared the previous highs of the candle pattern confirming a reversal as well as closing above the 10 moving average and the 1200 psychological level (psychological levels of resistance occur at zeros, 10, 20, 30, etc.). 

                The positive and negative di lines continue to converge with the advance decline line remains above the negative.  This indicates that there is likely still more upside to come and continues to be bullish for the moment.  The two di lines will probably touch and reverse when we reach the neck line.

                We had another uptick on the MACD histogram with the fast and slow lines moving closer to a cross.  When the histogram moves above the center line and the fast and slow lines cross, it is widely considered a short term bullish signal.  MACD is widely followed by many technical analysts as it is in “instep” indicator and tells you what is going on not necessarily what is going to happen but it can indicate shifts in momentum.

                The stochastic is moving more toward an uptrend than a cross and advancing towards the 50 line.  This indicates that momentum for the moment is positive.  This may be a little speculative with the volume drying up but the stochastic is usually a pretty good indicator of momentum.  Everything except the moving averages point to short term bullish at the moment.

                From here we can expect volume to pick up in the coming days with an advance to either the 20 day moving average or the neckline of our head and shoulders topping pattern (see my post for more information on head and shoulder patterns http://policonifi.blogspot.com/2011/08/where-it-was-where-it-is-where-its-gona.html ).  We may move past the 20 day and go all the way to the neckline as it is a stronger level of resistance (it has been tested 4 times already with no ability to get through it) but I would advise caution at the 20 day.  Often things will “bounce” off of or around their 10 and 20 day moving averages.  We saw this yesterday when we advanced out of the gate before smashing into overhead resistance at 1190 which was right below the 10 day.  I should note that the moving averages are still in a bearish alignment so this current uptrend will be short lived and the reversal will be harsh.  Watch the 20 day moving average and the 1250 level very closely as we advance and you will be ready for the reversal.

Oil Vs. Dollar

                Just a little insight into the relationship of oil prices vs. the U.S. dollar.  As you can see by the chart below, the U.S. dollar and oil have an inverse relationship.  This explains the current drop in oil prices as we have had an increase in the value of the dollar.  We have heard a lot of different theories from the talking heads on TV about what has caused this move.  However, as you can see, it is technically just the inverse relationship.

So where does it go from here?  I believe that over the short term we will see an even larger spike in the U.S. dollar.  Right now we are seeing what is called a wedging pattern which is usually a sign of accumulation.  The ADX lines are moving towards a bearish alignment in the short term but are forming a longer term divergence.  The MACD has moved into positive territory and is also forming a divergence.  And the stochastic is forming a divergence with a short term roll over.  All this indicates that short term, we are going to see a downward move in the dollar.  Long term, it could go either way but our indicators say it will go up.  In short, I think the dollar will continue to rise and oil will fall.  Unfortunately this will force the FED’s hand and bring about QE3. 

FOMC Statement

The FED does nothing.  They didn't raise or lower rates and no announcement of QE3 yet. They just came out and restated what the market has been saying for the past month.  Markets swing up and down in response.  check back after the close for analysis of todays market.

Where it was, Where it is, Where it's gona be

Where it was:  over the past year we have seen what is called a “head and shoulders” topping pattern develop.  This pattern usually occurs at the top of a trend hence the name topping pattern.  This pattern is one of the most telling of all market patterns.  I say that because off of this pattern you can usually expect a measured move.   A measured move is where price moves from one point to another (in this pattern this point is called the neck line) and then moves again in the same direction an equal point or percentage.  On August 4  we broke below the neckline of the larger pattern.

Where it is:  what a day, all major indices we saw dropped significantly.  The NASDAQ fell the most falling 6.9% .  If you’ll notice, we have gone well past the point where our measured move told us we were going.

Where it’s going:  What is left is speculation.  I can’t say with absolute certainty, but there are clues.  Here I will outline what I am looking at.  From here I am looking at several different price levels and sociopolitical factors.  1.) I am looking at support and resistance levels.  We broke through several and ended just above one.  We started the day by hitting a top off of the 1200 level and pushed through 1175 and 1150 respectively.  We eventually found some support at 1120 which was resistance a year ago today, and was coincidentally the point at which we saw QE2.

If it looks like a bear, sounds like a bear, and mauls you like a bear, it will rip your face off.  That’s right, we have entered a bear market.  Typically, and most bear markets aren’t typical, bear markets consist of three legs down.  Having begun the first leg, we haven’t seen any rally attempts yet.  Since we haven’t seen any rally attempts, I think one is coming soon.  the sooner the better.  The first rally attempt will likely come after our one trick pony Ben Bernanke announces QE3, which I expect he will do tomorrow.  Off of the first rally attempt we will probably go back up to one of the previous levels of support, that are now resistance.  I expect this to occur around 1200, or wherever the 200 day moveing average is when this rally occurs, before we head back down.  After that I am a little foggy.  For more in-depth analysis please visit Ron Walker and his video blog at http://www.thechartpatterntrader.com

What happens when you get a downgraded?

     What happens when you get a downgrade of a country's credit rating?  It's quite simple.  you can expect major markets and indexes drop as people move to cash.  this happens because, with the downgrade you see increased yields on bonds and T-bills.  in other words, the country who's credit has been downgraded now must pay a higher yield as an incentive for people to invest in their bonds and T-bills.  thus, yields go up while prices go down. 
     A higher yield on T-bills (or treasury bills) also will cause the value of the country's currency to increase.  this seems counter intuitive but T-bills are essentially a bond that represents a holding of that country's currency.  With this you also see commodities that are valued in that currency eventually increase in value due to the new strength of the currency (although initially you will see a sell off in these commodities due to the initial sell off in the general markets as people try to find safety for their money).
     You can also expect a so called "flight to safety".  this means that people will move their invested money into things that appear to be safe.  what is a safe investment?  investments where prices and yields are relatively stable, like gold and other commodities (particularly precious metals).
     What does this mean for you?  Some time after the downgrade occurs, the general cost of borrowing will increase.  That is, credit card rates go up, variable or floating rate mortgages go up, and businesses increase their prices to offset the increased cost of their borrowing.  However, it isn't all that bad.  That is, the value of that country's currency is now worth more, i.e. you'll get more proverbial "bang" for your buck on imported goods.  Also, banks will loosen requirements on the loans that they give because they can now get more "bang" for their buck as well.