July 2012 – Andrew Thrasher

Momentum’s Negative Divergence

Posted on July 31, 2012 by Andrew Thrasher

If you are like me you hate roller coasters. I know a lot of people enjoy them, they like the thrill of going up and down really fast while getting the adrenaline boost of almost dying. But they aren’t for me. I’m the guy who will sit in the middle, gripping the safety bar waiting for the stupid thing to be over.

This market has been like a roller coaster. We’ve had 5 days up, followed by 3 big days down to the previous low, then we had 3 days to break passed the previous high. This has likely been a short-term trend follower’s worst nightmare. Luckily we have had a fairly decent pulse on where things have been, with the note of support on July 25th, right before the three-day rocket we recently experienced. However, the weakness we looked at on July 24th in the small caps is still present, experiencing somewhat severe under performance to to large caps over the past few days..

I’m a big fan of the McClellan Oscillator, which I’ve discussed numerous times (here, here, and here). As you can see below in the top panel, the McClellan Oscillator has not mirrored the price action of the S&P 500 with higher highs. We’ve seen the McClellan fall from 100 to -2.75. In the bottom panel I’ve included the Ultimate Oscillator which takes into account three different time periods to measure momentum, this momentum indicator is also showing us a negative divergence.

Tomorrow will likely be a critical day for the market with it being a FOMC announcement day. It seems the market has been trying to price in additional easing, so if Bernanke does not give the equity market what it wants, then possible weakness could be in store.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

A Short Covering Rally

Posted on July 30, 2012 by Andrew Thrasher

I am the first to tell you that there are smarter technicians out there than myself. Which is why I make sure every time one of them is in the press I check in to find out their opinion on the market. Below are the thoughts of Mary Ann Bartels, the head of U.S. technical analysis for Bank of America/Merrill Lynch.

From the WSJ:

Just when the market was on the precipice of breaking key support on the S&P 500, ECB president Mario Draghi comes to the rescue with the promise to do whatever it takes to preserve the euro. Global equity markets responded positively. The S&P 500 reversed sharply on expanding volume to break above the previous high of 1380 to continue to rally to test resistance at 1400-1425 and the May 2008 high is near 1440. Key support is 1325, which held last week.

All is not rosy with the technicals on this breakout.

We have been making the case that the recent rally was more short covering than new demand (buyers). The technical indicators confirm this with negative divergences in price momentum and market breadth. If these indicators do not shift more positively, a potential correction into September is still on the table.

I tend to agree with Marry Ann. From what I’m seeing, momentum has not been participating in the rally’s the major markets have been experiencing, setting lower highs with each new high in the market.

Source: Shorts Eating The Rally, Biding Their Time

A Golden Breakout

Posted on July 27, 2012 by Andrew Thrasher

It appears gold is finally breaking out of its pennant pattern on what seems to be fairly strong volume. With the price of gold closing yesterday above falling resistance, we also see it has hit the resistance on RSI and every so slightly broke past the top trendline of the channel I’ve drawn on the On Balance Volume. From here we will be watching if original resistance trendline will become support on any future weakness.

One important note to keep in the back of your mind when evaluating commodities like gold, is the upcoming FOMC meeting. If the Fed does not give any additional hints or announcements of further QE, gold could see some weakness on the lack of additional easing..

What You Need to Know About Corn

Posted on July 25, 2012 by Andrew Thrasher

Corn has been a touch subject for many traders. I see a lot of traders posting their attempts to trade corn on Twitter, some have been successful others…not so much. Most have a gut reaction to think it has come too high too fast and still have the visual of when silver got up to $43/oz. before crashing to $29/oz. in a matter of days last year.

The drought being experienced in the Midwest has been awful, and as an Indiana resident I can attest to the number of 100+ degree days we have been having in Indianapolis. Below are some charts I’ve pulled from the USDA to show just how bad this year’s corn crop is.

First up we need to determine where most of the corn has been harvested in the past so we can zoom in to those states. Below is a chart that shows the number of acres of harvested corn in 2011.

It appears Iowa and Illinois were the largest harvesters of corn last year. So next let’s take a look at the current crop. Below we can see the progress of corn in Iowa. The top panel shows the percentage of crop that is good to excellent condition compared to previous years, 2012 being the red line.

And we are seeing similar weakness in Illinois…

Although the corn crop this year appears to be the worst at least through 2008, the price seems to be showing signs of potential weakness.

First up when looking at the price action in corn, I’m noticing that momentum (as measured by the RSI indicator) has been practically stagnant, making slightly lower highs but finding support near the 67 level.

Second, we will look at the bottom panel, the money flow index, which takes into account both price and volume. The MFI indicator has been creating a negative divergence for a few weeks now, but just recently it has taken out its previous low which completes the bearish divergence, as per the criteria laid out by the indicator’s creators, Gene Quong and Avrum Soudack.

Third, volume has been trailing off, setting lower highs while the price of the corn ETF rose and then has initiated some sideways action. Also notice that today’s attempt to stay above $50 was done on anemic volume.

The reason I started this post with charts from the USDA which shows the dire condition the corn crop has been in, is to remind readers that when it comes to commodities there is more to performing due diligence than JUST looking at the chart. However, while conditions seem to be worsening (we had another 100 degree day today in Indy as a matter of fact) the chart of corn appears to be showing some signs of exhaustion. It all comes down to which will traders give more credence, the crop reports or the chart?

An Update on the Ominous Omen

Posted on July 25, 2012 by Andrew Thrasher

I’ve gotten a lot of traffic for my post about the Hindenburg Omen. In the article I mention that there are various criteria out there for what constitute a trigger of the ominous omen. I think the fact that there are changing checklist for what people believe is a Hindenburg Omen adds credence to the notion that the Omen is more or less entertaining than tradable.

Nonetheless, I came across an article by Andrew Horowitz over at The Disciplined Investor that disagrees with the trigger of the Omen. He cites an email he received from Tom McClellan, who I have great respect for, in response to an article over at Stockcharts.com stating the Omen has in fact not been triggered yet.

“One of the criteria cited in that article is incorrect. He states that $NYA was above its 50MA, but that is not the correct criterion as published by James Miekka. Instead, the criterion is that this 50MA (or 10-week MA of weekly closes) has to be rising, which it was not.

This does not preclude the condition of NH and NL both exceeding the threshold from being bad news. It just means that it does not qualify as a Hindenburg Omen event.” Tom McClellan

I feel it’s important to show all sides of an issue, especially as I put little weight into the Hindenburg Omen and it’s prophecy. Take it as you will.