Why I think we could get a strong 2 - 6 week rally into and beyond earnings season

[Bruce Matthews]

Hi Steve and all other BullBear traders.

 

I have just been watching the your latest video update 08 July (like the format) and I have some additional comments / observations that lead me to believe that the current rally off of the July 6th lows will be more powerful than many traders expect and could result in a strong 2 - 6 week rally into and beyond earnings season.

 

Firstly, 'canarys in the coal mine' the junk bond ETF's JNK and HYG after dipping below their 200 dma's for 2 months are now back above their 200 dma's and look set to continue their advance. Movements in junk bonds are a very good indicator of whats in store for equities.

 

Secondly, so much noise is being made in the media about the recent 'death cross' (50 dma cutting down through the 200 dma) on the SP500 and NYSE. You can observe death crosses in some important Asian and European markets which made their crosses a few weeks ago and it looks like the bearish implications of those crosses are about to be erased due to the index climbing back above the 50 dma. See HK (Hang Seng), Spain IBEX, Italy MIB + others.

Also note that some leading world indices have always looked strong throughout this recent downturn, see Korea KOSPI, Singapore ST, India SENSEX, Brazil Bovespa, Russia RTSI.

Shanghai Composite is still a dog which is a worry I agree.

 

Thirdly, an indicator I find to be very powerful in determining the intermediate term trend is the 200 hour moving average on the hourly chart. In the recent failed rally which started on 8th June the SP500 hit the 200 hma on 14th June and managed to stay above the line for about 6 days. Notice that during that period the 200 hma was always in a down trend and that is important. A rally will generally not hold if the 200 hma is trending down. It needs another attempt after backing off.

In this current rally however, the 200 hma will be flat when the SP500 reaches it in a day or two and that will make a big difference to the strength of any continuation of this rally. Notice that the DJIA closed above its 200 hma (which is now flat and no longer in a downtrend) yesterday 08 July.

 

Fourthly, the Euro is strengthening against the usd and is targeting 1.31 which is the 0.382 fib retracement from the recent 1.50 - 1.19 move. Continued strength in the Euro is bullish for US equities, or at least that relationship has been bullish for a good few months now.

 

Lastly, I think we will get some serious short covering once traders realise that the recent over hyped death cross in the US indices is apossible  fake (bear trap) and some decent earnings numbers start to roll in.

 

Long term I'm very very bearish (I'm even in the Robert Prechter camp) but all in all I think we will get a strong 6 week summer rally from the current oversold conditions.

 

This would set us up nicely for a mid - late August top from where things would begin to unravel in a serious way for some possible violent declines into the fall.

 

Good Trading

 

Bruce (London)

[Steven Vincent]

Hi Bruce. Thanks for your post. In the future you may want to post in the Discussion Forum within the BBT room rather than here at the general site Forum. http://www.thebullbear.com/group/bullbeartradingservice/forum

Indeed for the most part JNK seems to trade with equities, unlike the long bond which is generally inversely correlated to stocks. I did a comparison chart and there appears to be a bullish divergence at the May and July lows with JNK making higher lows while SPX made lower lows. Of course there is a chance that fear was driving money out of equities into bonds in general, including junk bonds. That could still be bullish since it would indicate a significant amount of fear in the market regarding stocks.

[Steven Vincent]

Regarding the bear cross, I noted in the last BB Weekend Report that the cross is frequently the site of a rally if a deep decline has preceded it and indeed that has been the case this time. It was particularly likely given the extreme focus given to it, as you noted, alongside the supposed Head and Shoulders top. While important technical indicators, they are very well known and the focus of a lot of amateur traders, so the smart money would likely take the other side of the trade.

[Steven Vincent]

I noted the important bullish divergences between the SPX and many other world indices in the last report. I am particularly interested in India and Korea which are close to breaking out to new highs. Should they do so it may have bullish implications for equities worldwide. I am actually looking for a pullback in both markets to go long...but they may just break out strongly this week if US earnings reports are positive.

[Steven Vincent]

In this weeks report I indicate that the Euro will probably make a test of the 200 EMA but a retracement to the 50 EMA will probably happen first, at which point I am a buyer for a trade to 1.3060.

[Steven Vincent]

Certainly we have been seeing some short covering and probably will continue to see it for a couple of weeks as the bears got too overconfident and a lot of weak, late, dumb money got sucked in by the bear cross and head and shoulders events. You're right, earnings will probably be the catalyst. Once the shorts have been squeezed out and the earnings news is no longer news...what then? That will be another story.

I would be careful with self-identifying yourself as bullish or bearish. You can set a mental framework for yourself that traps you on the wrong side of the market. Be a BullBear...always ready to be on the right side of the market!

[Michael J. Sykes]

I've noticed a pattern of strength during the last hour of trading for the last 5 or so sessions, which seems bullish.

[Steven Vincent]

Generally it is thought that market professionals make their moves in the last hour of trade and "dumb money" does its thing in the first hour. I'm not sure how true that is but it's a long held market belief.