Yesterday’s Price Action:
Dow Jones – Upward Posture Could Morph Into Topping Risk
Dow Jones Industrial Average started the day under pressure and remained so through the day. For the first half of the day’s session, till 12:15 PM New York Time, DJIA was declining. At 12:00 Noon, DJIA made a Wyckoff spring on 15 minute chart – what Steve Nison calls crack and snap. The index breached the prior low made at 11:00 AM but then reversed and closed above the low. After testing the low again, DJIA turned around and for the rest of the day it traveled upwards before closing in the upper half of the day’s range.
So far, the index is trying to break above the resistance of 13200, which is also the 89% retracement of the May-June decline. In the three out of last five trading sessions, DJIA has made intraday high within 10 point of the high made on August 7th. The highs made on other two days were within 16 points. If the index doesn’t break above this range soon then the price action may take the shape of a topping pattern and break below the low of 13094 made on August 10 could be ominous.
The price action of S&P 500 and NASDAQ is similar. Russell 2000 – small caps – is still following and it was obvious based upon last two days of price action. S&P 500 has not broken below the low of August 7th – a larger up candle – though it came close on Friday. Russell 2000, on the other hand breached that low yesterday before closing at the upper half of the day’s range. When the traders are wary, like now – thinking that market is topping – the volatility in small caps increase.
The Dow Transportation Average – the other component of the Dow Theory – is still not following DJIA. It has stronger downside bias than upside, which is reverse of DJIA.
Yesterday was 16% less voluminous than previous Monday. It also had lower volume than all days since July 1st.
Overnight Action:
Futures – All Is Well, At Least For The Time Being
S&P 500 futures (September contract) turned upwards around Noon on New York time on Monday. They maintained their upward motion till early European session, nominally breaking above the May 1st high of 1405. The high was first broken at 9:00 PM and then again at 3:30 AM New York Time. eMini retreated after the second high. If it breaks below the intermediate low of 1403 then it may be a warning as that will complete a double top pattern.
Forex – Dollar Under Pressure
The US Dollar basket continues to trend lower in a down sloping flag. At least four potential supports level are emerging – somewhat weaker at 82.06 and 81.03 and slightly stronger at 81.56 and 81.39.
EUR/USD is still in a short term reverse head-&-shoulder pattern. It has come back to test the broken neck-line – briefly breaching it. It is bouncing up and if the rebound continues then the target of 1.2600 will again become valid. If the pair closes below the right shoulder of 1.2134 or if it stays narrowly range bound for the next few days then the pattern will be negated.
GBP/USD is well within an emerging symmetrical triangle. USD/CHF is mirroring the dollar basket.
USD/JPY is testing the upper limit of a bearish flag formation after testing the lower limit only yesterday. It is in the process of making a large upside day. If the move continues through the end of day and if it closes above the three weeks high, where it is right now, then the chance of an upside breakout increase never mind the bearish flag.
AUD/USD is retreating after failing to overcome the resistance confluence of 78.6% retracement of March-to-May decline, March 19th high and the psychological level of 1.0600. The upward trend hasn’t broken yet, though.
NZD/USD is in bigger danger of breaking the upward trend after encountering resistance – similar confluence – at 0.8224. A break below 0.8068 may take the pair much lower.
AUD/JPY is bouncing up after testing the broken upper limit of a horizontal channel. A move above 83.364 will re-validate the upward target near 85.60. A convincing close below 81.58 will negate the target.
Asia Parties On Hoping For Monetary Stimulus
Asian markets rose with hope of a global central banks rescue. Shanghai Composite tumbled 1.5% on Monday. On Tuesday it tried to save its fledgling recovery by advancing +0.3%. In the process it made a hammer candle. A close above today’s high will be greatly bullish for a market that has been a big drag on global equity markets.
India’s SENSEX is at the highest point since March 16th. It is breaking out of a cu-&-handle pattern. The cup lasted for about three months – April 3rd to July 10th. During this time, SENSEX declined by 11%. The handle lasted for about four weeks – from July 10th to August 8th. It retraced 50% of the advance from the low of the cup to the right top. This has increased the chances of a test of 2012 high of 18524. A close above that level will create few other bullish patterns. SENSEX is also forming an uneven inverse head-&-shoulder pattern with an upside target near 19500, which higher than 2012 high.
Most other major Asian markets advances by 0.2%-to-1.5%.
Commodities Are Showing Mixed Emotions
NYMEX crude is still maintaining an upward bias. The short term target of a small double bottom was reached on August 8th. Since then it is consolidating but remaining above the support level of the broken neck line.
NatGas, on the other hand seems to be breaking the uptrend since April 19th by attempting to make a lower high form the first time since June 13th.
Gold is still not giving a clear signal. It has fallen back in a symmetrical triangle after a failed break out. Silver is similarly placed, though it is trying a breakout on the upside. Copper is also in a similar trading range.
Corn and Wheat are retreating after the drought induce parabolic advance from early June to late July. Wheat is showing break down as it is in the process of making lower high and lower low. Corn, seems to be making a horizontal trading range and is respecting the lower bound.
The price action of soybean is closer to that of wheat than corn. Sugar, coffee and cotton are showing weakness and are moving toward the two year lows made in June. Cocoa is making a better attempt to mount a recovery as it is trying to break above the resistance level of 2012 high made in January.
Overall, commodities are depicting depressed prices more indicative of dis-inflation, if not deflation, than inflation. Deflation and inflation are both are bad for general equities market but disinflation is more positive.
Bonds – Capital Flight?
30-year US Treasury Bond is breaking below the lower limit of a two-month long horizontal channel. If the yields, $TYX (which moves opposite of the bond prices) move above 2.829, then it will increase the chance of another 30 basis points rise to 3.12.
Key Levels for the Day:
| Dow | S&P500 | NASDAQ | DJTRA | FTSE | DAX | VIX | |
| Previous | 13,208 | 1,406 | 3,021 | 5,064 | 5,847 | 6,945 | 14.74 |
| Open | 13,205 | 1,406 | 3,018 | 5,062 | 5,847 | 6,936 | 14.09 |
| High | 13,205 | 1,406 | 3,023 | 5,063 | 5,853 | 6,976 | 14.67 |
| Low | 13,113 | 1,397 | 2,999 | 5,025 | 5,814 | 6,882 | 13.67 |
| Close | 13,169 | 1,404 | 3,023 | 5,062 | 5,832 | 6,910 | 13.70 |
| Change % | (0.3)% | (0.1)% | 0.1% | (0.0)% | (0.3)% | (0.5)% | (7.1)% |
| Change | (38.52) | (1.76) | 1.66 | (1.39) | (15.23) | (34.88) | (1.04) |
| Close (vs. MidPoint) | Hi | Hi | Hi | Hi | Low | Low | Low |
| TR % | 0.7% | 0.6% | 0.8% | 0.8% | 0.7% | 1.4% | 7.3% |
| Resistance 2 | 13,255 | 1,411 | 3,039 | 5,088 | 5,872 | 7,017 | 15.01 |
| Resistance 1 | 13,212 | 1,408 | 3,031 | 5,075 | 5,852 | 6,963 | 14.36 |
| Pivot | 13,162 | 1,402 | 3,015 | 5,050 | 5,833 | 6,923 | 14.01 |
| Support 1 | 13,120 | 1,399 | 3,007 | 5,037 | 5,813 | 6,869 | 13.36 |
| Support 2 | 13,028 | 1,390 | 2,983 | 4,999 | 5,774 | 6,775 | 12.36 |
