Two thirds of August trading days are behind us but the month is not playing up to its reputation so far.

Bucking the History:

Stock Trader’s Almanac notes that over the past 61 years, August has been 10th best month for Dow Jones Industrial Average and NASDAQ or in other words, third worst. August is 9th best for S&P 500 and 8th best for Russell 2K.

On an average, DJIA lost -0.01% in August whereas S&P 500 gained only +0.05%. NASDAQ and Russell 2K have fared slightly better in August with +0.2% and +0.6% average gains respectively. The presidential election years are somewhat better with DJIA, S&P500, NASDAQ and Russell 2K recording an average gains of +0.8%, +0.9%, +2.7% and +3.5% respectively.

Compared to historical averages, 2012 August is faring much better. Month-to-date, DJIA has gained +1.5%, S&P 500 +2.5%, NASDAQ +4.3% and Russell 2K +3.6%. Almanac’s analysis also shows that  for the past eight years the end of August is stronger and that mid-August is stronger than the beginning and the end.

Near Upper Bound

Since early June, major US indices have risen within an upwards sloping channel. During this time the market has seen five rallies and four pullbacks. On an average, the rallies have lasted approximately seven days and gained nearly 5.0%. The averages for DIA are 7.33 days and +5.0% gains whereas the averages for SPY are 7 days and +5.3% gains. Most often, the turning points have been near the boundary lines of the channel.

The current rally – since August 2nd – has lasted longer but the gains are within the average range. If the DJA adheres to its recent trend than the estimated high for it would be between 133.02 and 133.90 whereas the estimated range for SPY would be 141.93 to 142.77. On Tuesday, DIA reached a high of 133.02 and SPY 143.0, well within the ball park of the estimates. 

Tuesday’s (August 21st) Action: Is This the Short Term Turning Point?

Tuesday’s price action for futures and major indices indicate that the markets are, perhaps, near a turning point. For the last few weeks, the US markets have been feeling a drag from the European events. Hence it wasn’t surprising that they were doing better after the close of European session. However, that was not the case on Tuesday. On Tuesday, market across the pond closed up in the upper half of the day’s range but the US indices closed down in the lower half of the day’s range. The volume was also higher across the board from previous day.

On Tuesday, in the early European session, the North American futures continued their overnight advance. However, this lasted only till the first hour of the New York session. At 10:30 EDT, the futures turned down after making a fresh high since May 20, 2008. They then traded down for most of the day closing in the lower half of the day’s range. In the process, S&P 500 futures made higher high and lower low than previous day.

The ETF for major indices, DIA, SPY, QQQ and IWM, made reversal candlestick patterns. Though, DIA did not made a fresh 2012 high, it turned back near the high and made a bearish engulfing. While, SPY and QQQ made four year high, their price action was similar to that of DIA.

IWM – the small caps – has been lagging the broader market for some time and is not near the 2012 high but it too faced resistance after making a four month high.

All – DIA, SPY, QQQ and IWM – made bearish engulfing patterns at or near a major resistance levels, which does not bode well for bulls. Any close below Tuesday’s low will trigger a short term pullback that may take major indices lower by 2.7%-to-3.5%.

Overnight Action: Downward Pressure Persists:

In the last hour of Tuesday’s trading, eMini tried to bounce up but that fizzled out and for most of the Asian session it drifted down trading in a narrow range. However, on the positive side, eMini reached the oversold territory – using 14-period RSI – by New Yorks session close. Later, it narrowly made a divergence. Since August 2nd, any such oversold reading on RSI (with or without divergence) has resulted in a 10-50 points bounce. To muddle the waters, none of the bounces occurred near strong resistance levels, which is the case at present. Also, the reversal patterns of Tuesday are quite strong and a follow through bearish action is a higher probability – that may take RSI to more oversold readings.

Asia – Somewhat Perturbed:

Asian markets were jolted by weak Japanese trade figures, which showed that shipments to Europe and China tumbled. The trouble was further compounded by the earnings announcement by BHP Billiton. Though, BHP beat estimates, it scraped a $30b expansion plan. This prompted a pullback for regional indices – most were near 3-4 months high.

Nikkei 225 dropped by -0.3%, Kospi fell by -0.7%, Shanghai Composite by -0.5%, Hang Seng by -1.0% and S&P/ASX 200 by -0.2%. SENSEX closed down -0.2%. Indonesia’s Jakarta Composite bucked the trend with +0.4% gains.

Despite, Wednesday’s decline, most Asian equity markets are not showing signs of any big pull-back. China’s Shanghai Composite, though, continues to give cause for concern as it refuses to get up from three-year lows. On the positive side, the fresh low for Shanghai Composite is showing a divergence for a 9-period RSI on weekly time-frame. Without a significant participation from Chinese stocks the global rally will be on weak support.

 Currencies: Greenback Hassled:

For some time, dollar index and S&P 500 have moved in tandem with brief periods of divergences. One such period was from early January to late April, when the S&P 500 advanced and the dollar index declined. Another such period seems to have stared in mid-July.

The dollar index is continuing its downward journey towards a rendezvous with 81.30 – see here. The corresponding target for UUP, ProShare US Dollar Index ETF, is near 22.25.

EUR/USD is resuming the inverse head-&-shoulder pattern after testing the neckline break. The measured target of 1.2600 is still valid. The corresponding target for FXE is near 127.

British Pound has a tendency to form a seasonal bottom in June and then continue to rise well into August. With some hiccups, this year is also shaping up well for the Cable. Yesterday’s action brought GBP/USD above the upper bound of a symmetrical triangle. The pair is also breaking above 50% Fibonacci level. This clears the path towards 61.8% retracement to 1.5900. The corresponding target for FXB is near 158.

Post BHP Billiton announcement, Aussie is pulling back with respect to the Greenback. Though the pair’s trend is still upwards, it is struggling to maintain above the trend line. Unless some major risk-averse event happens, the upward target near 1.0820 is still valid.

Compared to Aussie, Kiwi is facing stronger short term head winds, though its uptrend is still valid. The recent pullback in both these resource currencies indicates apprehension about the sustainability of the summer rally that started in early June. The overhanging confluence of resistance levels – March-April highs, 78.6% Fib retracement level and psychological 0.8200 levels – are quite strong for NZD/USD to overcome. Hence its vacillation near those levels is quite expected.

The third major resource currency – Canadian dollar – has been riding high on the strength of crude oil. Yesterday, it reached 89% Fib retracement level before bouncing up a bit. The Force is to the downside, though it may bounce back up to 38.2% or 50% retracement levels of the recent down leg before resuming the trend.

Commodities: Beginning of a Bull Run?

Commodities have been in a funk for some time. So much so that fears of deflation were looking to be real. After making a double bottom in late June, CRB Index is up by more than +15% and NYMEX crude oil by +26%. However both are nearing a resistance level, which may initiate a pullback.

 

Gold is also similarly facing headwind, however, it has broken above a symmetrical triangle for the second time in a month. The first attempt – in late July – lasted for couple of days before it fell back in the trading range. The upward measured target is in the vicinity of 2012 high of 1792. However, presence of many immediate resistance levels makes it a low probability target – at least in the near future.

Bonds – Broken Channel Continues

The capital markets are generally interconnected and their movements are contingent upon each other’s movement. Bond market is echoing the higher probability of a pullback in the equity market. After making the all-time high in July, the continuous contract of 30-Year US Treasury bond broke below a horizontal channel. This was good for equities as the money moved back into equities and commodities. The 30-Year US Treasury bond has a higher probability of reaching the measured target near 143.50, though it may retest the broken channel line before doing that.

The corresponding target for TLT is near 117.50 levels.

 Key Levels for the Day:

	Dow	S&P500	NASDAQ	DJTRA	Russell 2K	FTSE	DAX	VIX
Previous	13,272	1,418	3,076	5,190	817	5,824	7,034	14.02
Open	13,272	1,418	3,085	5,191	819	5,825	7,049	14.10
High	13,331	1,427	3,101	5,224	827	5,873	7,105	15.44
Low	13,187	1,411	3,059	5,181	814	5,825	7,042	13.46
Close	13,204	1,413	3,067	5,194	815	5,858	7,089	15.02
Change %	(0.5)%	(0.3)%	(0.3)%	0.1%	(0.1)%	0.6%	0.8%	7.1%
Change	(68.06)	(4.96)	(8.95)	3.89	(1.15)	33.15	55.63	1.00
Close (vs. MidPoint)	Low	Low	Low	Low	Low	Hi	Hi	Hi
TR %	1.1%	1.1%	1.4%	0.8%	1.6%	0.8%	1.0%	14.1%
Resistance 2	13,384	1,433	3,117	5,243	832	5,900	7,143	16.62
Resistance 1	13,294	1,423	3,092	5,219	824	5,879	7,116	15.82
Pivot	13,240	1,417	3,076	5,200	819	5,852	7,079	14.64
Support 1	13,150	1,407	3,050	5,175	810	5,830	7,052	13.84
Support 2	13,006	1,391	3,009	5,132	797	5,782	6,989	11.86