Thursday, August 12, 2010

At Risk of Losing China

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During the selloff from late April to mid June, I was not buying the thesis that the market was staging anything other than oversold bounces because neither copper (a commodity used in so much of the world's industry) nor China were confirming the sharp (but brief) bounces in U.S. equities.  This proved to be good reasoning as the sharp oversold bounces led to equally as sharp selloffs i.e. big head fakes.

However, in late June we saw copper and China stir to life so I was willing to believe the bounce had the potential for more life and stood out of the way from the short side of the ledger.  This also proved to be a worthwhile thesis.  Hence, I am keeping an eagle's view of these 2 charts to look for potential breakdowns.  Of the two, the Chinese equity market looks more close to breaking down.   However, we have different stories in the simple and exponential moving averages, always a pain in the behind to deal with.

Please note, these charts have a 1 day delay so do not reflect the overnight session price - the Shanghai index fell to 2575.  We can see on the exponential chart, after an oversold bounce the past 5-6 weeks, the index has cleared the 50 day moving average, and has been going sideways for a few weeks.  But selloffs have been contained due to that level of support, which has acted as a floor.  But that changed overnight.



The simple moving averages show a more benign picture as the 50 day moving average is lower, in the 2530s area.  Frankly, neither chart is "great" but holding the 50 day moving average would be key to believing a continued move upward can sustain.   Due to the discrepancy using the two kinds of moving averages, bulls can still hold onto the notion that the simple moving average is holding in, so one can hold the towel for now rather than throw it in; but another selloff of >30 points will change the towel situation.



As for copper, a break below $3.10 would bode ill.



As for the S&P 500, the index closed just above the key support we highlighted yesterday - the 50 day simple moving average, around 1087.  Cisco (CSCO) guidance / commentary last night signaled more uncertainty from a macro standpoint, and futures plunged quite severely but sometime overnight the 'urgent buyer' showed up to save the day and we have a benign futures market ahead of the weekly jobless claims.
  • "We're seeing a large number of mixed signals," Chambers said. "We think the words 'unusual uncertainty' are an accurate description of what's occurring."   Chambers said he saw a weak spot hitting in the second half of June, extending into July.
 A close below S&P 1085 or so is going to change the complexion of things.  Further, we now need 30 S&P points to get back to a spot to feel comfortable leaning long in an egregious manner.



Bigger picture, we are in a wide trading range of some 220 S&P points that we've been stuck in for nearly a year now.  [Aug 4, 2010: Amazing Fibonnacci]  A lot of churn to get nowhere in particular.  I'll get excited when we break below S&P 1010 or above S&P 1220.  Until them, it's HAL9000 taking us from "risk on" to "risk off" and back again.


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