For What It's Worth

[gjames]

12/02/2011-03:04 PM ET BEST WEEK SINCE MARCH 2009
It appears that the stock market put in an important low last week, and we believe the recent strength could carry into the first quarter, if not the second quarter, of 2012. Many of the major stock indices recently went through a fairly deep test of the double bottoms traced out between August and October, while many other indices and individual stocks have either completed bullish inverse head-and-shoulders (H&S) formations or are still working on completing inverse H&S patterns.

This week's gain of near 8% was the "500's" largest weekly increase since the week of March 13, 2009. That just happened to be the week that the current bull market in stocks got started. As important, it probably put to sleep, or hibernation, any more talk of a bear market until the second half 2012 or 2013, in our view. However, the market changes like the weather, so stay tuned.

With Wednesday's strong rally, the S&P 500 has once again moved into an area of strong technical resistance, so we think there could be a pause/pullback in the very near term. Short-term chart resistance starts at 1,220 and runs up to 1,290, while longer-term overhead supply is thick between 1,295 and 1,370. Trendline resistance, off the peaks since July, comes in at 1,275 when projecting out about a week.

On the downside, the 200-day exponential moving average sits at 1,234 while the 50-day exponential is at 1,217, and both represent potential support during a pullback. The middle of the wide-ranging price bar from Wednesday comes in near 1,220, while trendline support off the lows since October lies near 1,200 when projecting out a few weeks. If the "500" posts an intraday high today at 1,260.08 for the rally that started off the November 25 low, then a 38.2% retracement targets the 1,221 level, a 50% giveback equates to a pullback to 1,209, and a 61.8% retracement is down at 1,197. Wherever the short-term decline finally ends, we think it will be completed in the next week or two.

Once a pause/pullback is complete, we think the "500" could run up toward the 2011 bull market highs by the first part of 2012, with the index running up to the 1,400+ region sometime in the first half of 2012. Besides the chart and trendline resistance listed above, a 76.4% retracement of the decline from May to October is at 1,300. In addition, trendline resistance off the peaks since May sits up at 1,313 when projecting out about a month. Based on the height of the completed double bottom, we could see a measured move to the 1,340 to 1,350 region.

Based on the current rally that started in October, we think that wave 1 of a 5-wave advance ended at the end of October, and wave 2 (pullback) ended on November 25. That would suggest another rally (wave 3) into the early part of 2012 that takes the index up to the spring highs in the 1,350 to 1,370 region before another pullback, or wave 4, ensues. Wave 5, in our view, could take the "500" to 1,400+ by the first half of 2012.

The U.S. Dollar Index finally appears to be topping out from an intermediate-term perspective, and we think any slide in the greenback will fuel global stocks as well as commodities. However, in the very near term, we could see a move higher for the dollar and that could be the impetus for the pullback in stocks that we are looking for. Market sentiment toward the dollar has moved to a bullish extreme once again and is not far from the bullish sentiment extremes seen in September and early October when the greenback was peaking. On the flip side, sentiment toward the euro is very bearish, which is no surprise given the news flow out of Europe during recent months.

In addition, commercial hedgers (considered "smart money") are net short the dollar and net long the euro by a very wide margin based on the last eight years of data. Large speculators ("dumb money") are net long the dollar and net short the euro. The short position in the euro by this group of futures traders is one of the largest seen in the past eight years. Small speculators, also considered "dumb money," are net long the greenback by a very large margin, while small speculators are net short the euro by the largest measure in at least the past eight years.

Emerging markets look particularly interesting from a chart perspective basis and on the prospects of a weakening dollar outlook. Many key ETFs are tracing out very large inverse H&S patterns. Emerging markets where we are seeing large bullish reversal patterns being traced out include Latin America, Brazil, China, and Chile, and the associated ETFs include EWZ, ILF, GML, FXI, and ECH. We are also seeing some potentially bullish patterns emerge from frontier countries, but there formations remain behind the emerging markets. We note that the key emerging markets have been lagging the S&P 500 pretty consistently since October 2010, during which time the U.S. stock indices have done very little on a net basis. Renewed stock market leadership by these rapidly growing economies would be another bullish sign for our market, in our view.

Crude oil (West Texas Intermediate or WTI) looks poised to take a run at its 2011 highs near $115/barrel, while gold could challenge its all-time highs up near $1,900/oz. and possibly reach $2,000/oz. early next year. Treasury yields continue to trace out a potential inverse H&S pattern and need to clear the 2.4% on the 10-year to complete this formation and open the door for higher rates. Market sentiment towards treasuries has remained extremely bullish since August, and we think eventually this will lead to a correction in bond prices. We would consider a breakout to the upside in treasury yields as supportive of higher equity prices.
Mark D. Arbeter, CMT - S&P MarketScope

[dan_s]

IMO the fact that WTI crude oil closed over $101/bbl for the week is very bullish. It usually takes a 3rd breach of major resistance ($100/bbl) to set a new floor but we may have seen it today. Regardless, the Supply / Demand fundamentals for crude oil look quite strong to me.

Most of the E&P companies in our Sweet 16 and on our Watch List are still trading at prices well below break-up value (assuming we are in a $100/bbl world).