Today's Market WrapUp 01.15.2009 Mon Tue Wed Thu Fri Goldberg Archive
A Bottom and a Top
And Guidelines to Confirm Whether this is True
BY MARTIN
GOLDBERG, CMT
The overpriced bond bubble is about to pop and may have already seen its 27 year top. From a trading perspective, a clear and defined risk to reward ratio can be applied to this supposition in clear technical terms. In addition, following a "60 Minutes" report on the price of oil and a swoon in the oil market this week, the multi-month low in oil may have already occurred. With the last couple of weeks showing the re-occurance of "deleveraging days," oil is close to its late December bottom. A good risk to reward exists for those who think oil has seen its bottom in late December.
Oil in the Intermediate Term
Below is a 6-month daily chart chronicling the swoon in the price of oil as shown by the oil ETF: USO. Of short term importance is the most recent rally in oil that occurred in late December and lasted only 7 days yet carried the ETF price from $27.73 a share to $38.75. Viewing the entire 6-month timeframe, this was the only significant rally that occured throughout the swoon. Yet the fact that the rally occured within this relatively short term timeframe suggests that there may be more rally to come. In addition, the proposed bottom was reached with climatic volume and this would tend to support its being an actual intermediate term bottom. Note also that the latter part of the swoon, and late December rally was accompanied by decreasing momentum to the downside as illustrated by the upward trending 14 day RSI indicator (a short term momentum indicator), and the MACD, which is an intermediate term momentum indicator. Finally, the "60 Minutes" report is alerting of a possible usable contrary indicator.
This analysis could turn out to be incorrect; but we will know this with a small amount of risk if the ETF breaks down and closes below the former low of $27.73/share. With each move closer to the $27.73 mark on decreasing momentum, the risk becomes less and the reward more for oil bulls.
Long Term Bonds in the Long Term
Last month I made a case for the long term bond market making a long term top. In the short term, following a parabolic move in the direction of a 27 year trend, the bond market was in the midst of a swoon in the first few days of '08 and this was accompanied by a Barron's cover story alleging a bubble in the Treasury market. As shown by the 20+ year ETF chart for TLT, the proposed top in the bond market occurred when the ETF reached $122.74 in late December. After the early '09 selloff accompanied by the Barron's story, the return of de-leveraging days in the financial markets brought the ETF back to its current levels above $116 a share. The current technical condition suggests bond bears wait for the trend to turn downward on decreasing momentum to the upside before entering a bearish position. This analysis would be refuted if the ETF were to close at new highs.
Today's Market
After an ugly open, the market roared back in the afternoon and finished higher for the day on very high volume. The major indices closed at or near their daily highs. Small caps outperformed as indicated by the Russell 2000 rising over 2 percent. Given the market's oversold condition (the Dow was down 6 straight days), and the very high volume today, it would appear that the odds would favor a short term market rally over the next 5 days or so.
The short term tendency has been for the bond market to sell off during stock market rallies and for oil, gold and other commodities to rally along with the major indices.
Have a great evening.
Martin Goldberg
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