Morning Thoughts October 12 2011

After an out of the gate rally on Monday that lasted all day and closed at its highs, Tuesday was marked by some hand sitting as major U.S. equity indices digested the massive 9% gains in the case of the S&P 500 of the past six trading days.

The Russell 2000 much like the S&P 500 has rallied sharply off last week’s lows and sits just below its 50 day simple moving average and at a downtrend line measured off the September highs.

On the hourly chart note that the stochastics are overbought and a measure Fibonacci retracement of between 50% and 61.8% would bring this small cap index down to between the 635 and 650 area.  Given the sharp rally off the lows from last week it currently looks like those levels should hold as support and then give way to higher levels for the six to seven weeks or so.

A good chart to watch for risk taking appetite is that of the AUD/USD fx cross rate.  I have flagged this currency cross often in recent weeks and said that its move lower would be bearish for equities.  Last week the AUD/USD left a long weekly tail on its chart and found support right at a crucial support level on oversold stochastics.  For now this is bullish not only for the AUD/USD but also for equities.   

Another sign that the risk-on trade may continue for some time is the recent selloff in the bond market.  On the chart of the 10 year U.S. Treasury bond future note the break down and out of the trading range (blue parallel lines) and below the 50 day simple moving average (yellow line).  A significant medium-term top may have been reached.

Overall and despite the above charts I remain of the belief that we are in a bear market that will not come to an end anytime soon.  however, near term sentiment may have reached an extreme recently and a year-end rally at this juncture looks likely.  If and when we establish a confirmed higher low on the major equity indices I will look to add long exposure in the most oversold groups like energy, banks, insurances, and industrials.


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