Market versus system The S&P 500 is in a critical trading range, says Michael Ashbaugh, the technical analysts for the MarketWatch website. The daily chart shows trading is “crammed” between two significant technical areas: the support range of 1107 to 1115 which is the August low to the 200-day moving average; and resistance spanning from 1128 to 1131 which is the June and August peaks. Each close of the index in August has been above the 200-day moving average. The 200-day MA line the long-term trend indicator which means the outlook is bullish. Another bullish factor occurred Friday when the S&P reversed from the 200-day MA line on strong volume following an initial fall on employment data.

Cat Davey

Expert call
A local analyst with a history of making accurate calls on the stockmarket has turned bearish, says David Coe in The Australian Financial Review. David Hunt, the vice president of the Australian Professional Technical Analysts association, is suggesting investors take profits and reduce their long exposure to the equity market. He expects the Australian, US and UK markets to top, then drop for two to three weeks before a final rally in late September – giving investors another chance to sell (and CFD traders to go get short) before the market falls hard in late October and November. He believes the current rebound on small volume is a corrective rally before the big money of European and US investors gets back in the market following summer holidays. He cites bond prices as the key, given a fall in price (and rise in yield) is likely to trigger an unwinding of the carry trade where money is borrowed cheaply to fund riskier investment like the Aussie dollar and shares.

Warning from the bond market
Share and equity index traders would be wise to take note of action in the US bond market. Treasury prices at the short end of the curve have been rallying and yield has been falling to record lows, says Michael Kahn on Barron’s. That means investors are seeking safety at “insanely low returns”. Rising bond prices and rising equity prices don’t go together. Corporate bond yields are also falling; begging the question why is the difference between fixed income and equities payouts so small? The implication is that something’s got to give. “Is the bond market telling us that the US economy, and therefore the stockmarket, is not in the improved shape many people believe?” The rush to buy bonds is signalling economic fear despite the stockmarket’s rally. A double dip recession in the US may indeed have started.

S&P and commodities in lock step
Any move in the S&P 500 is likely to be matched in commodities, says Yi Tan on Bloomberg. A study of the S&P 500 index compared to the S&P GSCI Index of 24 raw materials shows the swings mirror each other. Walter Zimmerman, chief technical analyst at United ICAP in the US, says this phenomenon started in September 2008 and had not happened before. It’s a sign that commodities such as crude oil, gasoline, copper and silver are trading on economic expectations rather than their own supply and demand imperatives. Zimmerman is predicting the GSCI index could fall 43% over the next 16 months, to match the same low it reached in February 2009 of 306. It closed on Monday at 537.