Monday, December 14, 2009

Headwinds Abate Slightly

Last week the price of crude oil lost almost 10% pushing our composite indicator that is constructed from the trends in gold, crude oil and yields on the 10 year Treasury back below the extreme line. See figure 1 a weekly chart of the S&P500 with the indicator in the lower panel.

Figure 1. S&P500/ weekly

Although the value is not in the extreme zone, it still remains high. Of further note is the recent "saw tooth" pattern seen in the indicator. One week it is up and next week it is down; this is not typical. However, this pattern was last seen in late 2003 leading up to the January, 2004 immediate term market top. See figure 2. a weekly chart with the indicator in the lower panel.

Figure 2. S&P500/ weekly

Similarities between the current market environment and that one are well documented: 1) the equity markets were on a tear from March to December; 2) the Dollar Index was in a protracted down trend over the same time period; 3) the Dollar was undergoing a contra-trend rally in early January, 2004, and it appears the Dollar Index is starting another short term rally here.

Like year end 2003, I have been starting to see many technical similarities, such as the clustering of negative divergences. Back in 2003, this pattern led to a blow off and the intermediate term top in January, 2004. This is the outlier trade that I have been referring to for the past several weeks.


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Jason said...

What are your thoughts on the Coppock indicator? I'd never seen it till a few months ago and as I was watching it, I thought that you'd have an opinion on it.

Guy M. Lerner said...

Jason (Senor Goatmug): go to this link:

Goatmug said...

Thanks, somehow I missed that one on your site.

I downloaded the data and began playing around with future month-end numbers and the truth is; the Coppock will get your head blown off (of course if you used that as a turn signal to enter and exit trades)!
I plugged in hypothetical closing numbers for December just to see what it would take for the model to produce a sell signal --- I cam up with a closing value of 6700 on the Dow for December.
It may be me, but I need something that is a bit more sensitive to losses to prevent me from losing a limb.