Volatility Rising Again on Foreign ETF Weakness

Further to my post of March 6th, volatility rose again on Thursday's decline in most of the Foreign ETFs on my Daily chartgrid below, as represented by the white histogram which is just below price.

India, Brazil, China, and Chinese Financials closed below those March 6th lows today, and the Emerging Markets ETF (EEM) closed just above...ones to watch, particularly in view of the comments noted in my posts on the BRIC countries on March 15th and March 12th.

Additionally, I'll be watching to see if further downside continues on the other Foreign ETFs in view of the build in volatility and Thursday's continued decline in the U.S. Major Market Indices.

Will the American Consumer Save the Day?

Global economic data released Wednesday night and Thursday morning showed multiple contractions in manufacturing in China, in manufacturing and services in Germany, France and Europe, and in European industrial new orders. Additionally, core retail sales contracted in Canada, the price of homes continued to fall in the U.S., while the U.S. Conference Board's Leading Index rose, and unemployment claims dropped in the U.S.

That leaves saving the American economy up to Americans this year. With heavy debt loads already being carried by the average family, as shown below, one can see that will be a very monumental task (click this link for a bigger graphics picture). As noted in my post of March 7th, the levels of consumer debt accumulated during the past three months are higher than they were in 2007/08 just prior to the financials crisis, and are at their highest levels seen since January 2000...an interesting scenario considering that personal income has declined, as mentioned in my post of March 1st.

With brokers/banks peddling their stocks with the cry that "Now is the time to buy equities!" (which are at their peak in price from the 2011 lows), the question of the day becomes, "Does the average investor actually have the means to pile in at these pricey high risk levels, especially when U.S. investment by foreign counterparts may be shaky/unsustainable?" Banks may be forced to continue buying their own reserve of stocks, supplemented by low interest loans from the Fed, while continuing to raise bank rates. Under this scenario, when the Fed will actually begin to pay attention to rising inflation is anybody's guess.

(Click this link for a bigger graphics picture)

EUR/USD "Diamond" Pattern

Looking at the bigger picture, I'm watching the EUR/USD on this Monthly chart to see in which direction it breaks, once again, outside the rough "diamond" formation. At the moment, price is trading just below the dividing apex line. The high and low of the current month represent near-term resistance and support (1.3355 and 1.3003, respectively).

Money Flow for March Week 3

Further to my last weekly market update, here is a summary of where money flow ended for Week 3 of March, 2012.

The Weekly charts below of YM, ES, NQ & TF show that they all made a higher close than the prior week. The uptrending channel is still holding as support and direction for the Weekly timeframe. Secondary support levels lie at the middle Bollinger Band (12386 for YM, 1291 for ES, 2419 for NQ, and 768 for TF...note the bullish crossover of the mid-BB with the 50sma on TF this week...now the mid-BB is above the 50sma on all 4 e-mini futures indices).

As I noted in my post of March 15th, if the Major Indices are going to continue a convincing rally from here, it will be important for the Russell 2000 to break (convincingly) and hold above its February highs to provide added fuel. A failed breakout could lead to the onset of weakness, not only in this index, but also in the others.

The three Daily charts below depict support and resistance levels on the percentage of Stocks Above 20-Day, 50-Day, and 200-Day Averages.

Stocks Above 20-Day Average advanced higher to close just above the prior 60% resistance level...one to watch to see if it holds as support.

Stocks Above 50-Day Average inched higher to close just below the 70% resistance level, once again...one to watch to see if it continues to hold as resistance.

Stocks Above 200-Day Average inched higher to close just above the 70% resistance level, once again...one to watch to see if it holds as support.

The closing levels on all of these three charts are higher than the prior week. I'd conclude that, in the short and medium term, stocks remain mildly bullish, and in the longer term, stocks remain bullish.

The VIX fell by 7.48% this past week, as shown on the graph below. Please see the comments in my post of March 9th as related to major volatility resistance on the SPX:VIX ratio. The Daily ratio chart below shows that the SPX broke out relative to the VIX since then, thereby reversing the previous negative divergences on the RSI, MACD, and Stochastics. As the SPX is near the top of an uptrending channel in this ratio scenario, we'll see whether the SPX pauses or pulls back any time soon.

As shown on the graph below of the Industry Groups, the major loser was Gold/Silver once again. Financials was the big gainer, followed by Brokers. We'll see whether this weakness in metals and strength in financials/brokers, et al, continues next week.

For my latest update on the Financials ETF (XLF) versus SPX and U.S. $, I would direct you to my post of March 13th.

As shown on the graph below of the Major Sectors, Financials was the big gainer, and Utilities was the only loser...ones to watch for either continued strength/weakness, or a pause/reversal next week.

As shown on the graph below, the biggest gains occurred in the European and U.S. Financials Sectors (EUFN and XLF). A small gain was made in the Chinese Financial Sector (GXC), and a modest gain made in the Emerging Markets Sector (EEM). Small gains were made, overall, in the Commodities Sector (DBC) and Agricultural Sector (DBA).

Further to my post of March 15th, I'll be watching GXC and the Shanghai Stock Exchange Index in view of recent negative data released on China's Trade Balance and Foreign Investment. The uptrend was broken this week on the Index on the Daily timeframe on negative divergences in the RSI, MACD, and Stochastics, as shown on the chart below. Near-term support lies at the 50 sma and resistance just below the 200 sma. Additionally, any further drop in this Index may negatively affect EEM (see my post of March 12th for the latest update on EEM and the BRIC countries).

As shown on the graph below, the S&P 500 outperformed Gold and Silver, which lost, and Oil, which had a minor gain. Copper gained, as well. As mentioned in my post of March 15th, Thursday's bullish 50/200 sma Golden Cross on the Daily chart of Copper may provide further fuel for an equity rally...one to watch for a potential breakout above its trading range which began in mid-January.

As shown on the graph below of the Major Indices, the Dow Transports gained the most, while the Dow Utilities lost on the week...ones to watch for either continued strength/weakness, or a pause/reversal.

As shown on the currency graph below, the British Pound gained the most, followed by the Aussie $. Minor gains were made by the Euro and Canadian $, while the a minor loss was made by the U.S. $. Should Gold continue to fall, we may see further losses on the U.S. $, particularly if equities continue to advance...two to watch for any possible correlation.

Enjoy your weekend!

The Necessary Ingredient to Fuel This Rally

Below is a percentage comparison chart of the Dow 30, S&P 500, Nasdaq 100, and Russell 2000 Indices, and the Financials ETF (XLF). I've started it from the October 2011 lows.

As you can see, the Russell 2000 Index has been leading the advance from that point on a percentage-gained basis until the second-place XLF shot above it on March 13th.

The Russell 2000 has been, effectively, in a basing mode since February, but has been moving up from its low of last week and is now near the highs of this year. It had begun pulling further and further ahead of the other Major Indices from mid-December, and they have closed the gap to the point now where they have all been moving up "in tandem" from last week's lows.

If the Major Indices are going to continue a convincing rally from here, it will be important for the Russell 2000 to break (convincingly) and hold above its February highs to provide added fuel. Once that has happened, we can see where the leadership lies. A failed breakout could lead to the onset of weakness, not only in this index, but also in the others.

Thursday's bullish 50/200 sma Golden Cross on the Daily chart below of Copper may provide further fuel to such a rally. Copper is currently trading near the top of its range, which began in mid-January, and just above its previous Head & Shoulders neckline from 2011.

One to watch for a potential breakout, along with the Russell 2000 Index.

Foreign Investment in China Pushes Further into Negative Territory

Further to my post of February 15th, data released Wednesday night shows that Foreign Direct Investment in China pushed deeper into negative territory, as shown on the graph below.

I had mentioned in my post that 2350 was near-term support on the Shanghai Stock Exchange Index. After yesterday's drop, today's price action traded in a choppy range just above that level, as shown on the 5-day intraday chart below.

As I write this post during market hours on Thursday, the Daily chart below of this index doesn't yet contain today's candle. Near-term support now lies around 2300-2320. The uptrend from last year's low was broken on Wednesday on negative indicator divergences.

Add the above data to the mix of negative data pertaining to the huge drop in China's Trade Balance for February (as noted in my post of March 10th, and the outlook, at the moment, does not look positive...definitely the laggard of the BRIC countries and the one that bears a close watch.

Strength in Financials ETF vs SPX & U.S. $

Further to my post of March 9th, and as can be seen on the two Daily charts below, the Financials ETF (XLF) outperformed the SPX and the U.S. $ on Tuesday. With Tuesday's volume spike, the recent bullish Golden Cross of the 50 sma above the 200 sma, and a potential reversal of negative divergences on the RSI, MACD, and Stochastics indicators, these two charts are worth watching over the next days/weeks to come to see whether the Financials sector maintains its leadership over these two instruments.

The Daily chartgrid below of YM, ES, NQ & TF, as well as XLF, the major banks and a couple of the credit card companies shows an increase in volume on Tuesday's trading, as well as Golden Crosses on some of the banks, with this event imminent on the others. Whether we see a pause on those at the top of their Bollinger Bands, or a pullback, remains to be seen.

What Moscow and March 12th Have in Common

Some facts on Moscow according to Wikipedia:

• Moscow ( /ˈmɒskaʊ/ or /ˈmɒskoʊ/; Russian: Москва́, tr. Moskva; IPA: [mɐˈskva] ( listen)) is the capital, the most populous city, and the most populous federal subject of Russia. The city is a major political, economic, cultural, scientific, religious, financial, educational, and transportation center of Russia and the continent. Moscow is the northernmost megacity on Earth (but not the coldest), the most populous city in Europe, and the fifth largest city proper in the world. Its population, according to the results of the 2010 Census, is 11,503,501.^[8] Based on Forbes 2011, Moscow had 79 billionaires, displacing New York City as the city with the greatest number of billionaires.^[13]
• In January 1905, the institution of the City Governor, or Mayor, was officially introduced in Moscow, and Alexander Adrianov became Moscow’s first official mayor. Following the Russian Revolution of 1917, on 12 March 1918^[21] Moscow became the capital of the Russian Soviet Federative Socialist Republic and of the Soviet Union less than five years later.^[22] During World War II (the period from June 22, 1941, to May 9, 1945 known in Russia as the Great Patriotic War), after the German invasion of the USSR, the Soviet State Defense Committee and the General Staff of the Red Army was located in Moscow.

Below are two Daily charts of the Russian Index. After Monday's trading, price closed, once again, just above the 1700 major resistance level. Additionally, the 50 sma is nearing a Golden Cross above the 200 sma. However, as there are negative divergences on the RSI, MACD, and Stochastics indicators, it is not yet clear that 1700 will hold as support...a Global index worth watching over the coming days/weeks, since it is also one of the BRIC countries, which were the subject of my post on February 27th.

With respect to the BRIC indices, I would also note that a Golden Cross has occurred in the past couple of days on the Daily charts of India's Bombay Index and the Emerging Markets ETF (EEM)...also two to watch to see if this bullish moving average cross holds. China's Shanghai Index is still trading in a range in between the 50 and 200 smas (which are still in a bearish Death Cross formation)...I'll be watching to see what their Foreign Direct Investment numbers show when the data is released Tuesday night...the prior month's data released on February 15th showed a big drop into negative territory...another index to watch, particularly with respect to the latest data released last Friday night showing a huge drop in their Trade Balance for February, as mentioned in my post of March 10th.

Money Flow for March Week 2

Further to my last weekly market update, here is a summary of where money flow ended for Week 2 of March, 2012.

The Weekly charts below of YM, ES, NQ & TF show that the YM, ES & NQ all made a lower close than the prior week (with the NQ closing on slightly higher weekly volumes). The TF made a higher weekly close at a former resistance level. The NQ remains above its upper channel after this past week's retest. Price on the YM, ES & TF remain inside the uptrending Weekly channel...although the TF did pierce below the bottom of the channel briefly during the week.

At the moment, this uptrending channel is holding as support and direction for the Weekly timeframe. Secondary support levels lie at the middle Bollinger Band (12336 for YM, 1285 for ES, 2404 for NQ, and 765 for TF).

The three Daily charts below depict support and resistance levels on the percentage of Stocks Above 20-Day, 50-Day, and 200-Day Averages.

Stocks Above 20-Day Average continued their break down to the 20% level and bounced to close below the prior 60% support level...one to watch to see if it holds as resistance.

Stocks Above 50-Day Average continued their break down to the 50% level and bounced to close below the prior 70% support level...also one to watch to see if it holds as resistance.

Stocks Above 200-Day Average broke down to the 60% level and bounced to close below the prior 70% support level...also one to watch to see if it holds as resistance.

The closing levels on all of these three charts are higher than the prior week. I'd conclude that, in the short and medium term, stocks remain mildly bullish, and in the longer term, stocks remain bullish. However, they are still subject to a retest of their bounce levels...ones to watch for such a scenario.

The VIX fell by 5.21% this past week, as shown on the graph below. Please see the comments in my prior post of March 9th as related to major volatility resistance on the SPX:VIX ratio.

As shown on the graph below of the Industry Groups, the major loser was Gold/Silver...one to watch for either continued weakness or a bounce next week.

As shown on the graph below of the Major Sectors, Technology and Consumer Discretionary led the advance...ones to watch for either continued strength, or signs of weakness.

As shown on the graph below, small gains were made by the S&P 500 Index and the Financials ETF (XLF), as well as the Chinese Financials ETF (GXC). Large losses were made in the Agricultural ETF (DBA), and the European Financials ETF (EUFN). (Additional important details on XLF and EUFN are contained in my prior post of March 9th). Minor losses were made in the Commodities sector and in the Emerging Markets ETF (EEM)...as an aside, a bullish 50/200 moving average Golden Cross has formed on the Daily timeframe of EEM...one to watch for either confirmation of continued strength, or a failure and pullback.

With respect to China, I'd note that data released Friday night shows a huge drop in their Trade Balance for February (thanks go to a fellow trader at Tim Knight's Slope of Hope for the alert on this information). As it's the lowest number to come out since 2000, and if it's not a mistake, it will be worth keeping an eye on the China Shanghai Index to watch for any reaction during the coming week...and on the U.S. Major Indices, EEM, and GXC.

As shown on the graph below, the S&P 500 slightly outperformed Gold, WTI Oil, Copper, and Silver, while Brent Crude Oil made the largest gains...all worth watching, particularly with respect to any reaction to the China news.

As shown on the graph below of the Major Indices, the Russell 2000 Index gained the most, while the Dow 30 lost the most...two to watch during the coming week(s)...particularly with respect to any break with confidence of the lower channel on the Weekly charts of the YM & TF, as mentioned above.

As shown on the currency graph below, the U.S. $ gained the most, followed by the Canadian $. The British Pound lost the most, followed by the Aussie $ and the Euro. (Additional important details on the U.S. $ and Euro are contained in my prior post of March 9th).

Enjoy your weekend!

Europe on the Defensive

Kirk to Scotty: "What's the damage report, Mr. Scott?"

Scotty to Kirk: "Our defense shields are down after the last hit, Captain...and I don't know how long it will take to repair them...awaiting your orders, Sir..."

Kirk to Scotty: "Blah, blah, blah, blah, blah, blah, blah...yada, yada, yada!"

FAST FORWARD FROM THE 60's STAR TREK ERA TO FRIDAY'S GREEK CREDIT DEFAULT SWAP EVENT...and substitute "Kirk" with "Merkozy" and "Scotty" with "Draghi"...the words and message don't change...and, well, you get the picture.

With the problems of the entire EU's fiscal disharmony occupying Europe's time and attention as it endeavours to force austerity measures on EU members, it is difficult to imagine that any of these countries will grow their economy by any significant amount over the next year(s)...witness the poor numbers coming out of Europe and Germany relative to German Factory Orders, Europe's 2011 Q4 GDP, Europe's Unemployment Rate, and German Industrial Production, to name a few, since February.

As shown on the Daily charts below, the European Financials ETF (EUFN) and the EUR/USD forex pair did not participate in Friday's (albeit relatively subdued) rally  enjoyed by Germany and France...nor did Italy and Spain, as shown on the table below...Italy, in particular, was hard-hit.

As can be seen on the two ratio charts below of the DAX:EUFN and DAX:XEU, the EUFN and the Euro are producing a drag on Germany's Stock Market Index. Any meaningful and sustainable advance from this point in the DAX will need to see a resolution of this negative effect.

No doubt, the EU will face many more time-consuming problems over the coming months, which will require analysis and the deployment of damage control measures to mitigate any further negative impacts to its already-weakened growth prospects, and to attempt to attract foreign investment. This puts Europe's markets in a defensive mode as opposed to a robust, growth-oriented position. One of the issues facing Europe has been rising unemployment since 2008, in spite of the ECB's LTRO 1...we'll see if LTRO 2 makes any difference in due course.

That being said, longer-term investors may focus their attention on the U.S. markets, which are subject to less negative impacts from the Federal Government's fiscal disharmony and are under the protective umbrella of the Fed.

It has long been my view that in order for the U.S. equity markets to rally, the financial markets must also be on board. As a confirmation that any further advance in the equity markets is sustainable and supportable from this point, the financial markets will need to gather strength and participate in such a rally. I'd look for increasing and, more importantly, sustained higher volumes in both the equity markets and the financial markets over the next weeks/months as a confirmation of investor trust.

As can be seen on the two ratio charts below of the SPX:XLF and SPX:US$, the XLF (Financials ETF), in particular, is producing a drag on the S&P 500 Index. Any meaningful advance from this point on the SPX will need to see a resolution of this negative effect...there is a considerable headwind facing XLF at the moment. It will also be interesting to see whether money continues to flow into the U.S. $ should the SPX continue to rally.

Further to my post of February 28th, the ratio chart below of the SPX:VIX shows that the S&P 500 Index is at a major volatility resistance level and is faced with negative divergences on the RSI, MACD, and Stochastics indicators. This will bear a close watch to see if a short-term pullback is in order for the SPX, or whether a breakout  with confidence occurs (with the financials fully on board), sending the VIX further into complacency territory, and reversing these negative divergences.

Two events that the markets will, no doubt, be affected by for the coming week are the Fed meeting on March 13th (close attention will be paid to the Fed's "language" for any hint of further monetary easing programs that may be employed) and Quadruple Witching Options Expiry Friday on March 16th.

Consumer Credit Levels Higher Than in 2007/08

Consumer Credit Data released on Wednesday shows, firstly, a correction in the prior month's release data down to 16.3B from 19.3B, and, secondly, a rise in the latest month's data to 17.8B, as shown on the graph below (note that the graph does not show the prior month's data correctly yet).

The levels of consumer debt accumulated during the past three months are higher than they were in 2007/08 just prior to the financial crisis...in fact, they're at their highest levels seen since January 2000...an interesting scenario considering that Personal Income has declined, as mentioned in my post of March 1st.

Add to this potentially volatile and unsustainable mixture, the desire of the Fed to fulfill their "dual mandate" of improving unemployment and controlling inflation (as defined by their own formula and not based on the actual retail cost of goods and services by which the public is bound) by making even more easy credit available to the markets by whatever methods they deem appropriate, and it seems to be a recipe bound for disaster...and one from which the consumer won't/can't recover.