Market REPORT December 26, 2009

“The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”- Paul Tudor Jones

US MARKETS:

Greetings stock fans. After spending the past seven (7) weeks mired in indecisive gridlock via the sideways drift; chop-and-churn consolidation mode, the Spoo’s were able to go ‘topside’ of our previously noted SPX 1120 figure on a ‘close’ as the few market participants who remained during the shortened Holiday week of trade, ground the tape into higher territory, while perhaps more importantly, unfreezing the past several weeks seizure.

With investors and traders eyes pinned/focused on recent economic data releases, as well as sporadic earnings reports of the past couple of weeks in search of clarity with regards to potential direction, ‘seasonality’ factors ‘may’ have perhaps played the catalyst in last week’s ‘theme of green’. Nevertheless, while many may claim (take note of, as well as ourselves) ‘light or lack thereof volume’ as a potential harbinger of the recent move into northern territory as suspect and in need of further confirmation via heftier volume levels, price remains the final arbiter.

As a result, the major indices posted gains across the board in last week’s shortened trade led by the COMP’s 3.3% sprint, followed by the S&P 500, who tacked on 2.2%, while the DJIA finished 1.85% on the positive side of the ledger, with all three (3) indices resting at Year-to-Date highs perhaps seeking greener pastures as evidenced via the chart below:

As one can observe above, after seven (7) long and perhaps frustrating weeks of bump-and-grind without much clarity, the Spoo’s have gone ‘topside’ of the SPX 1120 figure on a ‘closing basis’ and now find themselves in position to challenge higher levels.

When examining the technical picture, the bias remains favorable and positive as relative strength remains firm with an RSI 62 read, as well as the MACD, which has recaptured the 0 line, both favorable characteristics.

Furthermore, and perhaps of more import, the Spoo’s continue to trade above their rising 20; 50 and 200-Day moving averages, which also bolds well and depicts a favorable posture.

Thus, while last week’s move ‘may’ appear ‘suspect’ in the minds/eyes of participants due to ‘lack of volume’ and or ‘seasonality’ factors (which may ultimately prove accurate), of which we are very well aware of both, we’ll continue to defer to price, as always, where the tape should continue to receive the benefit of doubt until or unless proven otherwise.

GLOBAL MARKETS:

Global markets/bourses traded with a positive bias in last week’s trade as green was the pervasive theme throughout, where equities in Asia finished at loftier levels across the board with the exception of the Jakarta Composite and KLSE Composite, where the former closed a tint of red, while the latter sound off on a flat note. Nonetheless, the region’s (Asia) markets/bourses continue to trend within their respective multi-month channels with the majority at the upper end, which from a technical perspective, should be acknowledged and respected, as well as provided the benefit of doubt. It was only just a month or so ago when we shared our ‘potential’ concerns with the Nikkei whom was flirting at the 9K level and managed to ‘hold on the goal-line’ and since recover in rapid fashion with the index now resting at the 10,500 level and perhaps ready to challenge higher ground out of what appears to be an inverted H&S (bullish) pattern that has since developed and in the process of materializing? Continue to monitor. As for ‘Down Under’, both the All Ordinaries and NZ 50 posted gains for the week, closing at their upper end of the ranges, respectively, while remaining within their multi-month defined channels. Moving on to Europe, the CAC; DAX and FTSE followed suit of the US by closing out the week with gains across the board and sporting New year-to-date highs, remaining in a favorable technical posture.

BONDS:

For the past two (2) weeks we’ve directed readers attention to the ‘possibility’ of a northbound move in 10-Yr yields when we stated, “from a technical perspective, relative strength, as well as a favorable MACD may be suggesting further upside in yield, and if the 10-Yr can go ‘topside’ of the 3.6% figure on a ‘close’ (Monday Gap) in the days/weeks ahead, it may just find itself making a run to the upper end of the range (3.85%-4%),” which is exactly what market participants were treated to last week when money flowed from Treasuries into equities markets sending prices lower and ticking yields higher with the 10-Yr tagging the 3.8% figure on Friday and closing out the week gaining 26bps on week highs. As longtime readers are aware, despite the impressive recent thrust (short-term overbought RSI 71), the ‘Note’ remains within our multi-month referenced zone of 3.2%-4%, perched at the upper end. Looking ahead, both the 3.85% and more importantly, the 4% figure represent ‘hurdles/resistance’, while the 3.5%-3.6%, as well as its 20; 50 and 200-Day moving averages beneath, lend future support.

METALS:

The metals remain in pause/correction/consolidation mode on the heels of firm $USD action as both Gold and Silver put in a week of ‘mixed’ trade with the former finishing fractionally lower and closing out at $1104.10, while the latter was able to post fractional gains and close out the week of trade at $17.51. While nothing has changed from a long-term perspective with regards to both Gold and Silver, where the metals remain in Phase II of their secular bull, we’ll reiterate for readers what we noted last week when we scribed, ““Having recently found themselves perched at ‘lofty/frothy’ levels, both metals have taken a backseat to strong dollar action of late and find themselves in pause/correction/consolidation mode, which we view as healthy despite the expected slippage and has had no meaningful impact on the primary (long-term) trend. Moving forward, gold finds ‘potential’ short-term support at $1100 and perhaps more importantly, at the $1050-$1070 area with recent highs ($1226) acting as ‘potential’ headwinds, while silver finds ‘potential’ support at $17 and perhaps more significantly, the $16 figure with $19.75ish acting as a ‘high-bar’ resistance,” which remains the case today as well.

CRUDE OIL:

After sliding the ‘slippery slope’ just a few weeks ago, crude seems to have regained/found its footing, for now, as black gold put in another week of consolidative action this past week where oil finished slightly lower at $72.73bbl. While further work and perhaps additional consolidation is required before we can declare that crude has stemmed the slide in its entirety and is now poised for higher levels, the action of the past two (2) weeks has certainly helped the cause, at least from a technical view. Moving ahead, both the 65 and 60 levels should provide for support, while the 75 and 82 figures will more than likely serve as headwinds/resistance should crude attempt an assault at higher levels in the days/weeks ahead. Overall, oil remains in consolidation mode as we await further cards from the deck to be revealed!

CURRENCIES:

The $USD pressed into higher ground in early trade last week only to be met by congestion (resistance) at its declining 200-Day moving average and as the week of trade progressed, appeared content in paring some of its recent gains, where the greenback finished fractionally lower closing out at 77.64, yet remains in decent shape from a short-term technical perspective and may require a bit more pause/consolidation before making its next move. As we noted to readers last week,“With the ‘greenback’ rapidly approaching short-term overbought conditions via its thrust of the past eleven (11) trading sessions and a ‘stone’s throw’ from its declining 200-Day moving average (78.35ish), as well as sporting a relative strength read of RSI 69, we would not be the lease bit surprised should the $USD find some pause/rest/consolidation as a result in the days/weeks ahead. Having said that, we remain well aware of the ‘potential’ for further ‘squeeze’ as we noted last week when we scribed, “the possibility of a severe ‘short squeeze’ due to the universally acknowledged $USD ‘carry trade’ that has been in practice during the past year,” which script now appears to be playing out to a ‘T’. Moving forward, the 78-79 area represents congestion (potential resistance) and should the ‘Buck’ be capable of going ‘topside’ of its 200-Day moving average (78.35ish) on a ‘close’ in the days/weeks ahead, the index will likely find further headwinds located at the 80-81 zone, while the 77-77.50 and 76 levels provide ‘potential’ support.

US Markets:

Short-Term: Bullish- SPX 1120 Has Been ‘Cleared’

Intermediate-Term: Bullish- Improving/Grinding

Long-Term: Bullish- SPX 1,000 Has Been ‘Re-Captured’

(Yet, within the confines of a secular-Multi

Year Bear based on Weekly charts)

POTENTIAL INDICES SUPPORT/RESISTANCE:

SUPPORT RESISTANCE

DJIA: 10,414; 10,263; 10,020 10,517; 10,632; 10,834

COMP: 2,253; 2,233; 2,180-90 2,304; 2,334; 2,360

S & P: 1,117; 1,107; 1,090 1,140; 1,168; 1,188

POTENTIAL SET-UP’S:

LONGS:

Imax Corp (IMAX) 12.61; Back to 11.40 and more aggressively above 13.10

Inspire Pharmaceuticals (ISPH) 5.89; X Crossing 6.55

Ja Solar Holdings Co (JASO) 6.05; Back to 5 and more aggressively above 6.40

SHORTS:

We continue to find very few favorable risk/reward set-up’s on the short-side. Much like last week, where our proprietary work showed a 4:1 ratio in favor of ‘potential’ Long set-up’s versus ‘potential’ Short set-up’s, that ratio has since increased this past week to 8.5:1 Long’s vs. Short’s this week. Therefore, no ‘potential’ short set-up’s this week and should one choose to hedge their long exposure, such can be accomplished via booking partial profits; writing covered calls and utilizing the indices via short ETF’s and or a combination thereof.