S&P 500 October looks alot like April

Daily Chart:

Let start with the fundamentals.

1) Jobs report on Friday October 8th - From Bloomberg
Released on 10/8/2010 8:30:00 AM For Sep, 2010

	Consensus	Consensus Range	Actual
Nonfarm Payrolls - M/M change	-8,000	-75,000  to 25,000	-95,000
Private Payrolls - M/M change	85,000	0  to 100,000	64,000
Unemployment Rate - Level	9.7 %	9.6 % to 9.8 %	9.6 %
Average Hourly Earnings - M/M change	0.1 %	0.0 % to 0.2 %	0.0 %
Av Workweek - All Employees	34.2 hrs	34.2 hrs to 34.3 hrs	34.2 hrs

2) Currency War
See a previous post on recent  Japanese intervention 
But in addition to this look at today's major news headline on Bloomberg.
Finance Leaders Call for IMF Role in Averting Protectionist Currency War

"Global governments called on the International Monetary Fund to calm the recent outbreak of tensions over currencies, which they warned risk triggering a protectionist backlash"

Speaking of protectionism : US House passes China currency sanctions bill 

Euro zone currency : Euro zone chief says currency too strong


A possible scenario I am looking at is that the market has priced in a significant part of QE2 and that is why the S&P is still climbing.  The real question that has to be asked is..... What if they don't do QE2?  Look at the instability in the Currency market.  The US 99% of the time will do what it needs to do, however, if there is some pressure to stop debasing currencies they might not have the political will to do another QE round.  IF that is the case, what QE has been priced into the market will quickly evaporate. 

Now if QE does happen then we will could still see a slow crawl up however, turning to some technicals it is interesting to see the similarity of technicals between April +/- a month, and October +/- a month.

ADX: The ADX line is decreasing showing a Weakening of trend.  As the Red and Green lines get closer watch for cross overs for potential turn date.

MACD: Both in April and in October the MACD histogram has had an extended period of positive ticks.  However, the MACD line is still >0 which is still bullish.  Watch for strengthening red bars on the histogram for a potential momentum shift.

Slow Stoch: Bearish Divergence in both cases as indicated by the line. The rally continued for about 20-30 days after divergence until the breakdown occurred.  It could be argued that the Slow Stoch is at or almost at its turning point.  Whipsaw in and out of the 80 zone (over bought condition) usually doesn't sustain.  It appeared from the chart when the the yellow line dips twice under the 80 line a breakdown is likely on the third drop below the 80 line.  Watch for the yellow breaking below the 80 zone for a potential momentum shift down.

Similar to the flash crash, this rally has its base build on top of a bearish divergence. This rally can still continue however, the higher it goes up the larger the potential for a strong bear move in the future.  The trigger of this could be a postponing of QE2, it is thought that November 2nd's FOMC meeting will be the timeframe QE2 is announced.  If this is the date that the market has also priced in the announcement, if it doesn't come then prepare for the market to adjust back to reality.

HFT.....

Jp Morgan Equity Derivative Strategy team was the topic of this article 
There are some mind blowing graphs such as S&P Correlation vs Volatility 

An interesting excerpt

"We believe that High-Frequency Trading activity has increased correlations, reduced volatility, and increased the intraday tail risk. In order to understand how HFT activity can impact the market, we will look at two common HFT strategies: index arbitrage and optimal execution of orders. Index arbitrage is an example of HFT arbitrage trading. As shown in Figure 5, current index volumes are significantly larger than total cash volumes, and a good amount of index derivative volume (Futures, ETFs) will not be directly offset by trades in cash securities. If the index price diverges from the prices of underlying constituents, index arbitrage HFT will act to realign them. For instance, if a group of stocks outperforms the index, an arbitrage program may sell these stocks and buy the index, causing their prices to realign. This trading activity will dampen the volatility of stocks and increase their correlation to the rest of the stocks in the index. HFT index arbitrage also facilitates the transfer of the market impact on futures and ETFs to the underlying stocks, thus providing a link between the high percentage of index trading and correlation of individual stocks. Another HFT trading strategy is a statistical arbitrage. A simplified example is a pair trade between two correlated stocks. If the price of one stock increases relative to the other, an arbitrage program will sell the outperforming stock and buy the underperforming one, thus reducing the volatility of both and increasing the correlation between the two."

S&P 500, Monthly chart 1995 until 2010

I was reading this article on Zerohedge.com and saw a monthly from the S&P 500.  I thought i would just comment on how important the Month of October is to this chart.

Dating back to 1995 you can see the 15 year history of the S&P 500.

Looking at the current level, it coincides with the downward sloping trend line from the previous 2 tops.  Also is approximately the 61.8% level from the highs to the lows in 1995.  The price action is sandwiched between the 20 + 200 monthly MA and the 1150 level.  This month would have to end above 1150 level this month before it runs into another major level at the 50 MA which is approximately the 50 monthly MA. The price will have a massive break up or down over the next few months.  We are currently down 0.80% for the month however, that is basically flat on this time frame and since there is still 15+ trading days left.

This is another example that shows that technical analysis creates a compelling picture of trend lines and moving averages that simply seem to align very well.

One more scenario to look at.

This is a possible triangle that is forming that could last until mid - 2014, it would imply that we are going to have a struggling economy at least for the next 3-4 years. The reason is that there is a definitive cap on upside potential as that top cyan line should not break.  It would also implies that there is a definitive bottom that has formed until this triangle is broken.

It could be a stretch however, I will continue to look at this scenario and hopefully I remember to post updates if the triangle has been broken, which could be this month if the markets continue to the upside.

Lastly.....A little Japanese Market Intervention to start the day

See Article from Bloomberg: BOJ Steps Up Asset Purchases
Literally 100 points in 3 minutes. 

It is my continued belief that a currency war / crisis may breakout as lower currency = greater exports and that is what everyone is banking on as their way out of the global recession. However, high unemployment in the US will continue to squeeze import demand.

Needless to say with where we are with the markets and where we are with the fundamentals of the global economy, an interesting time lies ahead over the next few months and years.

S&P weekly....

The Volume was higher this week then the previous 4 weeks to the upside... Along with a DOJI candle it appears the markets are undecided what to do. The Slow Stoch is over sold, and I do believe the markets should lower next week however, there is a chance we will see something similar to what happened before the May flash crash where Slow Stoch embeds and the S&P goes higher.  The biggest news day should be Friday with the employment situation in the states coming out.

Also I would pay attention to other Central banks and what they are doing to stabilize their currencies.  It will also be interesting to see what China will do with the Yuan peg.  I view this as a tactic that has been employed by many countries for many years.  Today it has become inconvenient for the States politically as it is being blamed for the unemployment rate.  I pose this question, if the Yuan value increase 15% (estimate I have seen was 25% undervalued), and manufacturing jobs begin to come back how long will this transformation take?  Assume it takes at little as 2 years, will tax payers be happy with every good in Walmart increasing by 15% for 2 years?  I don't think so, this peg if removed would be a death sentence for the consumer of the US and for businesses that get parts from china.

Gold/Silver, are still making new highs, it is amazing to see how strong they have been.  However, I expected a pull back before gold broke 1300, and I still expect a pull back or sideways consolidation before any other major moves that could take Gold realistically to 1350-1400 over the next 2 months.