Wednesday, August 24, 2011

Technical Update (8-24)

The Averages (DJIA 11516, S&P 1162) rallied hard yesterday, leaving the DJIA solidly within its intermediate term trading range (10725-12929).

By Steve Cook
All American Investor

Unfortunately, the S&P remained below the lower boundary of its intermediate term trading range (1172-1372). Yesterday was the fourth day of its challenge to the 1172 level and that is usually sufficient to confirm a break. And I am making that call.

So the issue is now, is 1101 the real lower boundary (see yesterday’s Morning Call for a full discussion) or has the S&P re-set to a down trend? Arguing for the former is that the indices rallied off the 10791, 1120 level (the low in the recent test of the early August lows [10725, 1101]--(again, see yesterday’s Morning Call for more detail); so we now have a successful test of the August lows at a higher low. Further, yesterday’s rally was on decent volume and breadth.

On the other hand, while the DJIA is trading above the very short term down trend line off its late July high, the S&P is not and won’t be till it breaks the 1210 level. Therefore, the Averages are somewhat out of sync; plus it is uncertain where the lower boundary of an S&P trading range is located if indeed it is in a trading range. Finally, while the VIX was off yesterday, it remains at elevated levels; and that is not positive for stocks.

GLD (177) suffered some serious whackage. Given the fundamental environment, I don’t see much likelihood of a trend reversal; but it could decline to 168 and not break its short term up trend, to 164 and remain above the UPPER boundary of its long term up trend, to 157 and not break through the lower boundary its intermediate term up trend and to 99 without penetrating the lower boundary of its long term up trend.

The point here is that I don’t have to challenge my own forecast regarding inflation or the likelihood (or lack thereof) of a sudden epiphany by our ruling class that would significantly alter the fiscal/monetary/regulatory landscape to accept that GLD could go lower, at least in the short term.

Bottom line: yesterday was a good day technically speaking: the 10791, 1120 level held and on good volume. However, I am under no illusion that stocks are off to the races, simply because nothing has occurred to reduce the risks that everyone was worried about Monday.

Certainly, the odds are now slightly better that stocks have seen the worse on the general premise that investors recognize that those risks are properly reflected in current prices.

That said, I hate buying stocks following a 4% up day. So I await another test to put more money to work.

More technical analysis on gold (short):

Why It's Critical To Watch Gold Right Now

Steve Cook earned an MBA at Harvard and did post graduate work in economics and financial analysis at New York University. He earned his Chartered Financial Analysts designation in 1973. Steve has 40 years of investment experience including institutional portfolio management at Scudder Stevens and Clark and Bear Stearns. He managed a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies. Steve now manges Strategic Stock Investments which focuses on wealth building through strategic investments.

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Original content Steve Cook, All American Investor