3 Long and 4 Short Ideas for August Thursday, Jul 28 2011 

3 Long and 4 Short Ideas for August

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Technical Notes – August 1, 2010 Monday, Aug 2 2010 

Hong Kong (Hang Seng Index)

The HSI stands at an important crossroads that will set the stage for a major move within the next two weeks. While the HSI has broken above its June highs, the 200-day moving average is providing ocular resistance while an ascending wedge formation has formed. The HSI looks to be entering overbought territory, a pullback may be coming shortly, and investors should tighten stops and be wary.

Longer-term charts sit at resistance levels and a move above these resistance levels would set the stage for a nice rally higher which may test old highs. If there is a correction, the strength of the pullback will determine the depth. Right now the technical indicators are all over the board and investors should proceed with caution.

Buried within the monthly chart is a pattern of lower highs and lower lows that needs to be reconciled before the market can move higher.

Japan (Tokyo Nikkei Average)

Political changes and continued deflation are causing the Japanese stock market to be a laggard in 2009. If the political waters begin to clear it is likely that the market can make a move higher closing the gap between its Asian peers.

The short-term charts may look like an ugly mess technically but if the 9200 level can hold, the economic slowdown is not too deep, and political indicators improve we may see the index move above the 50 day moving average.

The longer-term charts are sending clearer signals. If the current level holds as support, the stage is being set for a very good rally. One that may surprise and shock most portfolio managers as to the length and size of the potential move.

Should the current support level fail look for a move back to the 2003 lows and if those lows fail the 2008-09 lows.

Thailand (Thailand SET Index)

It has been my experience that whenever the Thai market is outperforming its regional peers, the stage is being set for a larger pullback. Managers have missed most of the run this year choosing to avoid the market waiting on the sidelines for the political waters to clear.

Both the short and long-term charts are in the overbought area signaling a pullback within the coming weeks. The SET Index may make a blowoff move to 900 but if that were the case investors should move to cash and get ready for a significant correction.

While I am bullish long-term on the SET and Thailand, the charts now signal that a correction may be in the cards and this 2010 outperforming market may give back a sizable amount of its gains.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Technical observations – July 25, 2010 Monday, Jul 26 2010 

United States

S&P 500

Technically, the daily chart is having a nice rally through the 50-day moving average and after factoring in the bearish sentiment as measured by AAII this rally may have some legs in the short-term. In order to turn positive the market is going to have to move through the 200-day moving average AND the June high, which would set the stage for a rally up to the April highs.

The weekly chart is bearish with a potential head and shoulders top formation and resistance at the 50-week moving average. Failure to break through resistance will be a significantly bearish indicator and will likely signal a move to new lows on the year.

The monthly chart is bearish and has been so since March when the stochastic peaked and we tested resistance at the 50-month moving average. Currently we sit at an important crossroads testing support at the 200-month moving average. Failure to maintain this support level is a very bearish sign and sets the market up for a possible retest of previous lows.

Nasdaq Composite

The daily charts of the NASD have just pushed through the 50 and 200 day moving averages with the next target the June highs. Technical indicators appear to be getting close to overbought territory and how the index behaves as it approaches the June highs will determine if this is a short-term top or preparation for a move to test the April highs.

The weekly chart is a bit more bullish as the index has just pushed through a convergence of the 50 and 200-week moving averages. A head and shoulders pattern is in the process of forming attention should be paid in the event the current rally runs into resistance in a few weeks time.

The monthly chart has just pushed through a key resistance level with the 50-month moving average. While the technical indicators are bearish, it is not inconceivable that the current rally continues for a small amount of time before finally rolling over.

Canada

TSX

On the daily charts, the TSX is tracking the Nasdaq Composite. Having already moved through the 50 and 200 day moving averages the next test will be the recent July high, which stands very close to Friday’s close. A move higher would mean the TSX would likely test the June highs then the April highs.

It is possible the TSX will lead the US and provide market leadership over the coming weeks.

The weekly chart shows a range bound market with the 200-week moving average providing significant technical resistance. A move through the 200-week moving average would be a significant technical breakthrough and a bullish signal but as we approach that point we may see the market enter into overbought status.

The monthly chart is showing significant technical resistance at the 50-month moving average level that is approximately 200-week moving average level. A move through this level would be a very bullish indicator for the Canadian markets.

It is possible that the Canadian markets diverge for some time with the US markets as the Canadian economy as a whole emerged from the downturn relatively unscathed and the Canadian banking sector is rock solid. The biggest concern would be a slowdown in the US caused by a lack of hiring, weak banking sector, a weak housing market, and slow consumer demand. Since a significant amount of Canadian exports are dependant on the health of the US economy Canadian economic growth will likely slow over the second half of 2010 into 2011.

A strong banking sector and vibrant consumer demand will allow the Canadian economy to weather and stormy seas caused by a slowdown in the US allowing the Canadian economy to be in the sweet spot globally with moderate economic growth coupled with low inflation.

Summary

So far, our beginning of the year call to be long the first quarter and short thereafter has been correct and the market appears to be following the expected path for 2010.

Looking back over history and the four-year Presidential cycle, the stock market’s low in the 2nd year of a Presidential term provides a nice rally into the third year as the President gears up for his reelection campaign.

Currently, the cycle was thrown off by the crash in 2008 along with the sharp rebound in 2009 but should return to form this and next years.

Within the larger 10-year cycle, the stock market has negative returns during the first few years setting the stage for positive returns later in the decade.

Investors should remember that while stocks are cheap, in the context of a long-term sideways market, it does not mean they cannot get cheaper.

Classic bull markets start in times of cheap stocks, as measured by PE’s, over a long-term horizon. It is likely that PE’s will continue to move lower as we see earnings increase over the next few years setting the stage for the next classic bull market.

With the indices led higher by low quality stocks and typically underperforming markets leading the way investors should be wary over the rest of the year until a tradable low is in place.

While the market continues to churn it is best if investors wait on the sidelines for the dust to clear.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.