Market Report - 11 July 2010

It has been a volatile four weeks since my last report. The Dow then stood at 10211 and it is now 10198, so barely changed. However that hides the true picture - it touched a low of 9614 a week ago and at that time the chart was not looking very good. Likewise, FTSE is now at 5132, slightly down from 5163 in the last report, but again that doesn't give the whole story, which is that the index touched 4790 in line with the Dow making its low. The moves back up have swung the short-term picture away from bearish back to neutral, and we have a very finely balanced technical position. Indeed, I would say that this is the trickiest call I can remember since starting the reports in October 2006.

It's worth repeating what I said about the apparent head & shoulder top formations that have been present on both charts. Assuming we have been in a bull market (this assumption was originally based on the Coppock signal) then these top formations are quite early in the cycle, i.e. bull markets usually last considerably longer than that. As I explained last time, this is a "context" argument, and it is one of the most powerful tools in technical analysis, although I have to say it's seldom applied. What it means is that you don't just interpret patterns in the same way wherever you see them, so two similar looking head & shoulder tops might need different interpretations depending on their context, i.e. where on the chart they appear and what occurred previously. In the current scenario, the context is that of a much shorter than average bull market.

Another thing I'm very much aware of is that the market seems to be holding up against a huge expectation that it is going lower. If they were being honest, I'm sure the bears would have to concede that they have been surprised that the indices haven't broken decisively yet. There simply seems to be a reluctance to head lower in a meaningful way.

As I said, it really is finely balanced. This is a big problem analytically, because every few hundred points the balance of probability swings one way then the other. One week it might look like 60/40 in favour of a bullish outcome, the next it's reversed to 40/60, the week after it's swung back again. There really isn't much you can do here except wait for the market to give you a clearer picture and a better probability.

The Dollar did not continue its downtrends against Sterling and the Euro as I had been expecting. A basic rule of technical analysis is that a trend in motion is more likely to continue than to reverse, and in the absence of evidence to the contrary, assume the trend will continue. This rule normally serves us well, but obviously there are times when any rule doesn't work. Currently the Dollar is at 1.52 against Sterling, up from 1.45 last time, and 1.26 against the Euro versus 1.21 previously. These look like rallies working against overall downtrends rather than major reversals, so short-term they may well move higher, but I'm not convinced about a change to the bigger picture yet.

Gold stands at $1211, down from $1226 in my last report. This also hides the volatility between reports, with a high of $1265 and a low of $1185. Again, we seem to have a short-term trend working against the main direction, and this has taken quite a lot of momentum out of the overall uptrend as $80 is a pretty severe correction. However, looking at the Point & Figure chart, it would be premature to say that the bull market is over at the moment, however a move below the recent low would certainly call it into question.

(c) Robert Newgrosh 2010