S&P Projection – Flat

There’s often talk of whether the market will be heading up or down. Don’t forget sideways! My differentiated call is that the market may be in a period best characterized as range bound. The 1300 level may serve as the bottom end of the range; I’m not sure about the upper end yet, but we may be close. Here is what it would look like:

SPX is right at an RSI level of 70. The difference between a trending and non-trending market can be observed in RSI. If my thesis of a range bound market is correct, the 70 level should not be definitively surpassed.

The VIX (weekly bars) is now poking into the “old normal” levels last seen in 2007. The market may be getting duller.

Finally, below is a chart of the last eight months in which I have plotted the S&P 500 against Copper adjusted for the US Dollar’s valuation. The latter has been very weak, recently penetrating below its 200 day moving average! This divergence suggests that equities’ strength may falter.

Rahal's Theorem

Disclosure: My interpretation and analysis of T Theory ™ is entirely separate from that of founder, Terry Laundry and his T Theory ™ Foundation. To learn more about T Theory ™ visit ttheory.com

The following is a theorem I have constructed based on principles from T Theory ™ and Money Flow Ts ™ intending to resolve the two. As some of my older readers may know, I have explored the development of Ts spanning intraday or for slightly longer time frames. The following theorems will prove valuable in improving the reliability of shorter time frame Ts.

Theorem:

A T is a comprised of a centerpost, a right arm and a left arm (axiom)
The left arm is the cash buildup phase (axiom)
The right arm constitutes an uptrend (axiom)
A Money Flow T ™ is an uptrend whose midpoint is a peak in MFI (axiom)
Hence, a money flow T is the right arm of a T (theorem 1.)
Hence, a money flow T is equivalent in temporal-length to the left arm of a T (theorem 1.a.)
Hence, there is a peak in MFI at the midpoint of the right arm of a T (theorem 1.b.)

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In other words, a Money Flow T ™ describes a property of the right arm of a T, namely, a peak in MFI at its midpoint.
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One application of this theorem is that if one constructs a T in the traditional fashion, one would expect there to be a peak in MFI at the midpoint of the right arm. If there is a peak in MFI, this confirms the T construction. If there is no peak, then there is some misplacement in the left arm or the centerpost of the T.

Alternatively, if there are a couple of possible Money Flow T ™ constructions, one can extrapolate the left arm of a T for both constructions (theorem 1.a.) and see which one fits best into a cash build up period. Here is a step by step example of such a process:

S&P 500 Intraday Bias, 10:00 AM

Neutral

Gold Correction Update, and the US Dollar

Although gold prices have penetrated the trendline shown in the weekly chart below, a brief penetration often occurs during a terminal move. If prices fall back below this trendline, that will be a strong signal that a significant correction in gold will take place.

The US Dollar (weekly chart) is near a multi-year low. Its devaluation has partially fueled gold prices; this fuel is running near empty. A lot of bad news on the dollar has been discounted already.

Gold-linked stocks are generally a leading indicator of gold, the commodity. The former has yet to surpass its December 2010 high although the latter has done so by over 7%. Moreover, the prices of gold the commodity, adjusted to be unaffected by changes in the value of the US dollar, have also yet to surpass their December 2010 highs. Show below is adjusted gold plotted against the gold miners ETF; the price of the commodity is below those two.

All of this evidence suggests that gold will correct.

S&P 500 Intraday Bias, 10:01 AM

Positive

US Sovereign Debt Rating

Last week, Standard & Poor's rating agency decreased its outlook on the rating of US debt. Because of the quick and strong stock market recovery and because the idea of US default seems absurd, this news event has been deemed immaterial. This is not the case.

If the quality of US debt is downgraded, investors will demand a higher rate of return from it, i.e., an increase in interest rates. Institutions with restrictions on debt quality may also need to rebalanced portfolios consisting of US treasures. This will also result in higher interest rates. Finally, if the dollar remains weak, it is yet another deterrent to foreign investors who would have a lower return when interest payments are converted to their local currency.

There is no question that higher interest rates are "bad for the economy." Because of the reasons stated above, my conclusion is that any other negative developments regarding the quality of US debt may result in a more enduring stock and bond market reaction, after some initial buying by anyone presuming that the market will treat this news release the same as the one on April 18th.