Does the Fed really want to tap the brakes in September? Technical analysis of some futures markets

By The Royals Most parents with school age children will dig deep into their pockets to buy and supply their children with clothing and school supplies. This is not an indication of financial health of the family, but rather the known behavior of parents regarding the needs of their children. Most parents will spend for their children for two reasons: one, because it is their responsibility to give their children the best they can afford to give them and two, to save face in the community so that their neighbors don’t pity them or look down on them. Wouldn't it be nice to be able to get school supplies at cost for those in need, those who just fall above the level of being able to obtain goods and services given to those in dire need? How about just giving the school supplies to deserving students, we could stimulate employment of those supplying the tools of education and a really deserving group would be rewarded, the students. Consumers contribute to the economic expansion by spending which helps keep the economy’s appearance more healthy than it actually is. The appearance of expansion can be deceiving especially when spending is on credit. This spending is not using discretionary income but rather debt and it is called, distressed spending. Much of the rise in costs these days can be attributed to the costs of fuel. This will resolve itself once the Middle East situation is under control. Till that time, yes, the cost of gasoline and crude oil will be supported by fear. Here in the USA we really do not have that problem and have plenty of fuel, however; the European nations and other parts of the globe relying on imports are scared. That fear is causing the cost of fuel to remain artificially higher than it should be. Crude oil will cause problems as we enter the heating season throwing more people into financial distress than the cost of gasoline, which doesn't help either. The sneaky problem that nobody is looking at is the cost of natural gas, which is what many people use to heat their homes. Energy is not in short supply here in the USA but the fear of supply disruptions is causing the rise in the product cost. The fly in the ointment is the US Dollar which, should it soften further, will affect the price of crude oil and all other products traded in our currency. A weaker US Dollar leads to a higher price in the cost of commodities traded in US Dollars. The cost of borrowing is becoming more expensive which, is a greater threat to the economy than the fluctuating cost of gasoline. We have written about this before and continue to wonder why the central bank tap the brakes and pull back their purchases in September, the worst performing month of the year? October, by the way, is almost as bad coming in second in the lousy month contest. Why would anybody want to throw gasoline on the burning embers of the economy? Why not wait for the rainy or snowy season, say December or January when the market seems to have more buoyancy. As to the US Dollar, naturally as bond yield rise, the dollar appreciates. Remember the yield of the bond is inverse to the price so a declining price indicates that the yield are going higher, higher yields support the US Dollar, which in turn depresses the prices of the commodities that are trading in the Dollar currency. Also as the US Dollar appreciates, our goods and services become more expensive for our non-US trading partners. International firms will feel the pinch although most of them have learned how to hedge away the risk of the US Dollar’s change. At the moment, we are not seeing the US Dollar appreciate rather; it is in decline which is helping ratchet up the price of commodities including energy. The S&P 500 retreated in the Friday session without disrupting the short-term uptrend line at 1684.55 for the Monday session. We are trapped in a trading range with the top at 1705 and the bottom at 1670.50. The current Bollinger Bands on the daily chart are becoming very narrow and it indicates to us that we will likely see a burst of volatility moving forward. All the indicators that we follow herein continue to issue a sell-signal with plenty of room to the downside. The 5-period exponential moving average is 1691.04, which we are below. The short-term rule with that is that if we are below the 5-period exponential moving average, we should be short, above it long. Certainly that rule is too hard and fast and does need some occasional adjustments. The top of the Bollinger Band is at 1704.03, the lower edge is seen at 1670.33. The upward trending channel lines are 1682.16 and 1710.75. To turn this chart positive we need to see a definitive cross and two-day close above 1696.25. If this market continues to trade in a narrow range it will break to one side or the other on August 13, 2013. Do not fight that trend and go with that trade. We are above the Ichimoku Clouds for all time-frames. There is some concern with the weekly chart which could be a rounding top or a bear flag not sure yet. It seems to be too early to make any call regarding the direction of this market. We know it is having trouble making upward progress but we also know that most retreats are viewed as buying opportunities. Most of Friday’s volume was seen at 1689+/- and above 1696.75 there isn’t much supply which means that there is little holding the market down. On the weekly chart a different picture emerges. There is heavy volume, 19.3% at 1698 or so. That tells us that as we approach that area, that there will be selling. On the downside, 17.7% of the week’s volume was seen at 1686. The point and figure 1% by 3 box reversal chart has no downtrend lines. That said, it is clear that we are losing volume as the market moves higher. The NASDAQ 100 left a large red candlestick on the chart as a result of the Friday trading session. We did print a lower high and a lower low on the day but managed to close above the uptrend line. Before thinking that this is a buy-signal remember that we need to close above the downtrend line for at least two days to consider this a real change of direction that is from down to up. That trend line is 3135.82. We are above the Ichimoku Clouds for all time frames. The stochastic indicator, our own indicator and the RSI are all issuing sell-signals with plenty of room to the downside. The 5-period exponential moving average is at 3117.27, we closed below that level. The top of the Bollinger Band is at 3149.03 and the lower edge is seen at 3015.58. If long, use 3088.75 as a spot for extreme concern. That is the bottom line of the trading range. This market is trading in a narrow range, at the moment with the high of 3140.25 and the low of 3088.75. Should we break below that 3088.75 level, we will likely test 3023.50. Although the weekly and the monthly charts are issuing a sell-signal at this time, they are close to doing so. The daily Market Profile chart shows lots of activity at 3112 which tells us that below that number, the longs are going to get scared and sell. Should this market rally it will find supply at 3122.80 and 3124.24. That said should the market trade above 3134 it will test 3136 and then be free to rally further without the worry of supply. That is a wish and hope for those of the bullish ilk. On the downside, we are very unstable at 3107 and will likely fall further should we remove that level. The 1% by 3 box daily chart continues to look bullish, however; the RSI on this chart, although pointing higher, is a bit stretched. We are above the upper Bollinger Band on the daily point and figure chart which is a little concerning. There are no downtrend lines in sight, well so far. The Russell 2000 left a doji candlestick on the chart and presents us with a head-and-shoulders pattern. That isn’t good for the bulls in the crowd. We also have a mechanical sell-signal issued on the chart on August 6, 2013. All the indicators that we follow herein are pointing lower with room to the downside. The 5-period exponential moving average is at 1047.95. The top of the Bollinger Band is at 1059.52 and the lower edge is seen at 1035.58. We are above the Ichimoku Clouds for all time-frames. The Bollinger Bands are becoming narrow telling us that there is a violent move in the near future. The bands only tell us that it is come but never tells us the direction of that move. Looking at the pattern on the chart, we would say that the move will be to the downside rather than the upside. To be wrong, we will see the market trade above 1056.60 and then 1062. So far, the volume is nothing to write home about but it is notable that there was lower volume on the formation of the head than on the formation of the shoulder and the current shoulder is also somewhat lighter volume. This is test book stuff. It is also notable that we are below the 5-period exponential moving average and below the 20 day moving average, but do not bode well for the bulls in the group. The 1% by 3 box point and figure chart is telling us a different story. It isn't bearish and actually looks quite good although overbought. The daily Market Profile chart tells us that above 1051.20 we will melt to the upside. That said, there isn't a lot of volume to be seen here. 1047.15 is the high volume area on the weekly chart which accounted for 16.9% of the week’s volume. Below 1037.40 we will likely melt to the downside, might not be slow but a rather quick flush out. The US Dollar Index did rally in the Friday session leaving an inside day on the chart. We are at a critical point with the drop dead zone at 80.50 below that level is 78.93. We are below the Ichimoku Clouds for the daily time-frame and above the clouds for both the weekly and the monthly time-frames. All the indicators that we follow herein continue to issue a sell-signal with some room to the downside. The daily 0.25% by 3-box point and figure chart shows us that there is some concern about holding the uptrend line. The 60 minute 0.25% by 3-box chart has a downside target at 78.417. This chart gives us concern and enforces the possible retest of the some lower values. The 5-period exponential moving average is seen at 81.37. The top of the Bollinger Band is at 83.50 and the lower edge is seen at 80.91. Remember as the dollar becomes weaker, the commodities priced in dollars become more expensive. We continue to believe that unless the US Dollar can rebound from here that we will retest the recent 80.55 and perhaps probe some lower levels. Crude oil seems to be the beneficiary of a weak US Dollar. The market rallied in the Friday session. We are above the Ichimoku Clouds for all time-frames. The 5-period exponential moving average is at 105.29. The top of the Bollinger Band is at 108.78 and the lower edge is seen at 103.10. All the indicators that we follow herein are issuing a buy-signal. The Bollinger Bands have become very narrow and we expect to see a violent resolution to that. There is a value of 102.67 that we must stay above on a closing basis. We tested that level this past Thursday but were able to close above it. The pattern seen is that of a possible “M” formation which would tell us that we could, should we break the neckline number of 102 +/- retreat to the 92 area. The pattern at this point is iffy because of the Friday rally. Just keep your eye on that 102 level. The Market Profile chart shows us the importance of the 102+/- level. The 1% by 3-box point and figure chart looks friendly well, so far. We do have an unfilled upside target of 117.47 and seem to be forming a flag formation. The 60 minute 0.40 by 3-box point and figure chart does have a downside target of 92.11 which is the same target as we found using the “M” pattern. We shall see if it plays out. We would need to see peace in Egypt, and the US Dollar rally to help us achieve that goal. Gold left a doji candlestick on the chart in the Friday session. As you know, a doji is a candlestick that represents indecision or possible change in direction. Basically it illustrates that the negative and positive forces canceled each other out and neither won for the day. The candlestick was rather narrow and seems to have stopped right at the downtrend line. We would need to see a close above 1315.80 to get any short slightly interested in cover that position. A close above 1346 would scare the shorts into covering and it is likely that a strong rally would result from that close. The other side of the trade is the 1270 low of the Wednesday session, a violation of that area and the bears will press their bets and assume that the 1179 level will be tested. The 5-period exponential moving average is at 1306.38. The top of the Bollinger Band is at 1351.15 and the lower edge is seen at 1267.30. We are inside the Ichimoku Clouds for the daily time-frame, below the clouds for the weekly time-frame and in the clouds for the monthly time-frame. The 1% by 3-box daily point and figure chart does not look very good. At this time gold seems to be holding its own but isn’t far from breaking to the downside. The 60 minute 0.40 3-box reversal point and figure chart looks somewhat better but has a downtrend line as its obstacle.