It remains to be seen whether the 78 WMA is going to be able to resist the onslaught of bad news and bits of selling pressure that have been persistent for the last 4 months. However, past history favors its success. Taking a closer look at its behaviour during the last decade, shown in the accompanying charts, it is clear that this line acted both as support and resistance proving to be a formidable barrier to penetrate either to the downside or to the upside.
Please note that in the latest correction the sp 500 was able to penetrate this line on September 2009 through a powerful upward thrust move and it is only now that this line -78 wma- is being tested as resistance for the first time since the March ’09 bottom. There has been one successful test already during the weeks of 6/27 and 7/04 and it appears these past two weeks – 8/22 and 8/29 – have been a confirmation. However, when it comes to markets nothing is set in stone and unless we see a powerful bounce soon, indices may go for another retest which may not bode well. Historically, the more restests that happen the greater the chances that support and resistance lines will break.
Looking at more details, the sell-off of government bonds in the last 2 weeks is a bit of an encouragement in that money flows may be reversing. But there are still mixed signals… The wide head and shoulders formation that is present in almost all indices hasn’t gone away. In addition, the US dollar has been trading in a narrow range and a trend is yet to develop. It is not clear whether this trend will be up or down.
Extending the analysis to global markets, the chinese property index appears to be on the rise one more time and the bottom that was set last July has been holding fine. We’ve written before that the Shangai Property index has led global markets both to the upside and downside, peaking and bottoming prior to the SP 500 in a range measured in months.
Money with zero maturity (MZM) has also been on the rise, perhaps due to the additional liquidity coming from Fed operations. Also in the past, markets responded following closely the same trends set by MZM. Ted spread has given back all the move to the upside that started with the revolt in the markets earlier this year and is sitting at levels seen for the last time on April. We are unsure whether the downward march will continue even though the consistent downside path should be an indication that financial markets have been healing for some time. The same can be said for the Libor-OIS spread. The general interpretation is that short term funding among banks in the euro zone has been get better.
On another front, the BDI also appears to have bottomed continuing its climb while the very important container index (CONTEX) also continues its upward move, albeit at a much slower pace. In all, there are many data points that indicate global commerce is stable and getting better, financial markets opening up again and US markets working out a bottom.
But for the next few sessions volume follow-through will remain the key.
What can really work like magic for the markets is a rapid change in this administration’s policies! And its good we can dream all we want.