A Thousand Miles To Nowhere

While I didn't get the memo, today apparently marked another holiday for the equity markets as volumes (2.9 billion shares on the S&P 500) clearly showed that participation was non-existent.  And while the major indexes spent the majority of the session down a little more than 1%, traders managed to claw back most of the losses and close the day largely unchanged.  The equity market's ability shrug off European debt contagion concerns is certainly a feather in the cap of the bulls and indicative of resilient underpinnings.  But as I've been saying for the past few weeks, the push/pull between the negative economic data points and the positive seasonality of the equity markets are likely going to keep things mired in a sideways trend that sees a fair bit of intraday movement.  Today was yet another manifestation of that very scenario and I see little reason to expect things to meaningfully change in the coming weeks.  As such, I continue to see little significance in the price action in the equity markets for the remainder of the year, though the next two weeks will set the stage for the direction of the early 2011 trade.

I haven't posted charts for a few posts now, so I thought that I might recap the three major markets I've been watching of late:  equity, gold, and the U.S. Dollar.  Let's start with equity.

While much has been said about the future direction of equity prices, I think the chart above does a good job of summing up why I believe that prices will be hard pressed to move higher.  As you can see, both the RSI and MACD have put in bearish divergence indications on a weekly basis.  Simply put, this suggests that the recent move to new highs was completed with less investor conviction than that seen in the April highs.  This implies, to me, that the equity market has gone too far too fast and is in need of a meaningful pullback.  Couple this with the declining volume trend and it seems clear that moving higher will be challenging for a while.  I wouldn't be surprised to see the S&P 500 test the 1,150 level before the end of the year, with a break to 1,125 possible if something spooks the marketplace.  However, it will be critical for the S&P 500 to maintain the 1,125 range to keep the current up trend in place as several technical indicators lie at this level.

While I looked like a crazy man a month ago when I suggested that the U.S. Dollar (DXY) was primed for a bounce, recent price action has proved my optimism to be well founded.  With the MACD (intermediate term indicator) now in an outright buy signal and RSI sitting at a neutral level, the DXY rally appears to be intact for the foreseeable future.  However, given the speed of the recent move higher and the proximity of the 38.2% retracement level, I fully expect the DXY to pullback a bit over the next week or two.  The daily chart of the DXY (not pictured) notes several price gaps over the past week, which will need to be back filled prior to the market moving higher.  However, with European debt issues still at the forefront of the news cycle and likely to remain so for some time as Spain, Portugal, Italy, and others begin to look for monetary assistance, the fundamentals appear firmly in place for the move higher indicated by the charts.

In what can only be described as an eerie similarity to the indications seen on the S&P 500 chart, gold too has seen its RSI and MACD indications of bearish divergence.  This is in keeping with my bearish bias for the yellow metal and certainly suggestive of a coming correction of some sort.  In fact, there's an argument to be made that gold is in the midst of putting in a head and shoulders top.  I believe talk of such a formation is premature at this point, but it's something to keep an eye on for sure.  But while the technicals and my own perspective clearly sit on the bear side of the fence, gold's ability to hold its gains amidst huge gains in the DXY is indicative of a market that is simply too well bid to fall.  This development is without a doubt the most concerning and compelling reason for not shorting gold at this point in time.  Despite this, though, I continue to believe that a dip down to 1,250 is quite possible and, from the bull's standpoint, necessary if the decade long rally is to continue.  Only time will tell if my bearishness will prove well founded.

Lots of economic data out tomorrow, so I would expect the markets to trade in a fairly volatile manner, especially if volumes mirror that of today's session.  The Institute of Supply Managers Index and the ADP employment data will probably garner the most attention as investors look to signs of growth in the domestic economy.  With jobless claims falling rather significantly over the past month and a half, many investors, myself included, will be looking for confirmation of this trend in other data points to see if the data is truly reflective of the economic fundamentals.  But as is often the case this time of year, the data is likely to come with large caveats given the seasonal adjustments that have to be made.  As such, the market is likely to look past these data points until cleaner data is released.  As a result, I look for the equity market to have a largely higher trade tomorrow, especially given today's late session boost.  However, much like today, the close will likely not be far from unchanged as the year end stagnation continues.  While certainly not the sort of trading environment that garners a lot of attention, the intraday moves are likely to give bulls and bears heartburn just the same.

Until tomorrow.....