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Wednesday, January 14, 2015

Daily update 1/14 Is the global economy slowing?

We had another big gap down today that investors seemed to be hesitant to sell into.  Here is the daily SPX chart.

SPX tested the last swing low with a slightly lower low.  It then proceeded to bounce into the close.  The volume picked up pretty good on the bounce.  In case you are not familiar with this price structure it looks like a possible double bottom.  All the market veterans know the pattern well.  Those new to trading the last few years probably wonder what in the world that is.  They have never seen anything but a V pattern low.  Breadth was 59% negative which was a bit less then the last two days.  There were 146 new highs and 222 new lows.  I find it interesting how the new highs have held in there so well.  The pullbacks to the 100 DMA the last couple of years saw sizable drops in new highs.  Is that a sign there is a lack of fear?  I know that nearly everybody is convinced the market can only go up this year.  The election cycle and year 5 stats have been promoted so much you just about have to live in a cave not to have heard them.  Is that why there is a clear lack of fear here?  Lets see what the futures chart has to say.

The futures are clearly trying to hold at the 200 SMA.  We now have a possible short term double bottom structure forming.  They closed below the 200 overnight, but never confirmed the break with a lower close.  This chart is reflecting a 5 point bounce after market hours.  I don't know why.  They still need to get a confirmed break above the 100 SMA to get out of trouble. 

There is a very large number of open SPY puts at 200.  The writers of those puts have a vested interest in seeing SPY close above 200 on Friday.  I am pretty sure they were busy trying to support the market today and likely are why we bounced in the afternoon.  The bulls may be emboldened to buy on the possible double bottom.  However, I think it is equally likely that sellers will show up again at higher prices.  It looked much more like people did not want to sell into the big down opening rather then selling exhaustion.  If they can't hold that support at 200 until Friday we could see a big slide.  A move below 199.5 on heavy volume could cause some selling of futures for hedging which might put significant pressure on the market.  It is a goofy acting market.  Be careful.

I have read a lot of articles and seen a number of pundits on TV saying the global economy is just fine.  Nothing to worry about just buy stocks.  This reminds me a bit of when the ECRI guy was on TV in April of 2008 saying the U.S. was in a recession and they laughed him out of the studio.  Lets look at some charts.

GWL is an ETF representing global stocks ex U.S.  It is more then 15% from its high.  The next three charts show oil, copper and 10 year U.S. rates outright crashing.  Interest rates around the world are doing that.  On top of all that the ECRI WLI growth indicator is collapsing pretty fast as well.  When I last showed this indicator I said the U.S. econ data was likely to show weakening at some point.  Today's disappointing retail sales might just be the start.  There is clearly enough data to show the U.S. and the global economy look a bit precarious.  Whether we tip into a global recession or bounce back strongly remains to be seen.  However, until we see an improvement in these charts there is downside risk.


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