Commodity, Currency, Gold, and Equity Market Analysis by Dr. Christian Normann  
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Weekly Market Analysis Based on Closing Prices, Friday July 31st 2009 - CURRENTLY ON VACATION - NEXT UPDATE WILL BE POSTED AUGUST 29th.

Introductory Summary:
  • U.S. and World equity markets are in multi-year downtrends. The recent rally pushed up past our expected 930-955 resistance range for the S&P 500 index, and is likely heading for a test of the 300 day (65 week) moving average around 1015.  Many individual stocks and indices have reached significant resistance, and we closed our long positions with large profits a bit early rather than risk holding on too long.  For anyone still long the S&P 500, we think this is a very risky proposition at this point.  The market is most likely far closer to a significant high than a major low at this point.
  • After crude oil finally broke back up through the $50-55 area, it quickly ran up to major resistance between $68 and $80.  We went long oil when it corrected to around $47 (the level around which we previously noted that we expected short term support).  We next moved our stop up to about $49.50, locking in a moderate profit with and the potential for significantly larger profits to come.  Those larger potential profits were realized when we sold out near anticipated resistance between $68-$70.  Now that crude broke back below $70-68 on a weekly close, a test of $55-50 is likely (at which point we may buy back our long position).
  • Gold has been in a correction of the move from $681 to the recent test of the $1000 level / $1033.90 record high.  We have long stated that the likely target for the correction was around $855-$823, and gold hit a low of $860 so far.  Gold then moved up for another attempt at breaking the $1000 level.  Whether it breaks $1000-$1050 this time or has another major pullback is unknown until we see a weekly close above $1050 or a fall below $900.
  • The US Dollar appears to potentially still be in a significant uptrend against most other currencies, although the future borrowing needs of the U.S. (as we've long stated is likely to be accomplished through money-printing) could end that uptrend very suddenly.  In fact, it is possible Bernanke ended it on March 18th.  Right now, the U.S. Dollar Index is sitting right in the critical 80-78 area, and it needs to rally soon, or else odds will greatly increase that a new downtrend is underway.  When the Dollar breaks, owning other currencies such as the Euro, Japanese Yen, or Canadian Dollar might help protect your wealth.  However, owning gold and commodities may well turn out to be much better insurance against enormous bailout and stimulus packages to be implemented not only by American, but also European and Asian governments throughout the next several years in misguided attempts to boost borrowing and consumption.  Rather ironic, given that it was precisely too much borrowing and consumption that got the world into this situation in the first place.
  • Follow Normann Financial for clear and concise chart and market analysis, as well as updates on whether the Federal Reserve and the other central banks of the world are failing or succeeding in inflating (destroying the purchasing power) of the U.S. Dollar, Euro, and other fiat currencies.  The charts provide far better information than government officials or Wall Street.
  • Given the events presently occurring in world financial markets and the global economy - the likes of which have not been seen since the 1930s - it is vital to protect oneself.
Detailed Analysis of Individual Charts of Current Interest:

The Gold/S&P ratio has corrected back to our anticipated target area, indicating that the time to exit general equities and re-enter long gold positions likely here - or near.

U.S. and World equity markets are in multi-year downtrends. U.S. and World equity markets are in multi-year downtrends. The recent rally pushed up past our expected 930-955 resistance range for the S&P 500 index, and is likely heading for a test of the 300 day (65 week) moving average around 1015.  Many individual stocks and indices have reached significant resistance, and we closed our long positions with large profits a bit early rather than risk holding on too long.  For anyone still long the S&P 500, we think this is a very risky proposition at this point.  The market is most likely far closer to a significant high than a major low at this point.

The most plausible target range for the next intermediate bottom for the S&P 500 remains around 620-580 and 5900-5500 for the Dow Jones Industrial Average.  Initial support is likely around S&P 800, and if 775 breaks on a weekly close, the odds of a continued fall down to test the March low at 666 increases significantly.

For the S&P 500 (chart below), note the significance of the 200 day (43 week) and 300 day (65 week) moving averages.  They tend to offer stiff resistance during major downtrends (a good example of which can be seen during the 2000-2003 bear market).  The plausibility of breaking the 980-1015 resistance range any time in the next several months has significantly diminished now that those moving averages have fallen so far.

Once the market hits a final bottom, all the moving averages are eventually certain to be broken through to the upside, but that may be another year or more away from happening.  For example, during the 2000 to 2002 bear market, the S&P took 31 months from the peak to the ultimate low (down 51% from the peak).  During the 1929 to 1932 market collapse, the Dow Industrial Average took 34 months to hit bottom (down 89% from the peak).  So far, the S&P is only 21 months into its current bear market.  There could easily be about a year of decline left for the equity markets.

When the S&P and most other major world indices eventually successfully clear both the 200 day (43 week) and 300 day (65 week) moving averages, we are likely to see - at the very least - a cyclical bull market lasting a couple of years, and - depending on how things turn out - possibly a new major bull market lasting several years. 

More than anything - as we've long stated - the longer-term outcome may depend on the future world energy situation.  Will there be sufficient crude oil and natural gas production?  Will (and can?) alternative energy sources be scaled up quickly enough to compensate for potentially declining world oil and gas production?  For now, the start of any kind of equity bull market (and not just another multi-week or multi-month bounce) is likely well into the future, but these questions will quickly take center stage when the world economy attempts to resume its growth.  The level of the oil price - measured both in terms of paper currency and in ounces of gold - will likely be the single most important factor with regard to the future of the world economy.

Until next weekend, have a very good week.  Always remember that proper risk management is essential - don't fall victim to complacency just because the markets have seen much lower volatility over the past couple of months.  There could be - and most likely will be - at least one more major leg down for general equities and likely also most commodities this fall / winter.

 

 

 

 

           

 
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