Look for a big move to form in this 6-month pattern
The major indexes posted respectable gains in the last
week of the 3rd quarter. Monday through Wednesday
produced mixed results, as market players seemed to lack conviction. This was
especially frustrating for the bulls, given that the equities markets failed to
respond positively to less destructive damage than expected from Hurricane
Rita. Equities acted better on Thursday and Friday, and despite all the talk of
end of the month window dressing being behind the gains, it’s also important to
remember that the markets were pretty oversold coming into the week. Chip
shares led the way higher, which was nice to see after the group’s lackluster
behavior in recent weeks.
The December SP 500 futures
closed out the week with a rebound and a gain of +13.75 points, while the YM
posted a better relative gain of +162 points. On a weekly basis, the ES posted
a market structure low with a reversal off of its lower wedge trend line, while
the YM posted a market structure low and continues to contract into a
symmetrical triangle. Looking at the daily charts, the ES posted a “NR7” day
and was able to hold above its broke MA resistance. The YM also posted a “NR7”
day and was finally able to clear its MA resistance. Both contracts have
effectively negated the bear flags that they were forming last week. For you
daily 3-Line Break followers, the ES remains short with a Break Price of
1248.50, while the YM is also short with a Break Price of 10720.
                   
With
only 3 months now remaining in 2005, I would expect a pick-up in volatility
moving forward. The key issues to watch as we move into year-end are the
following: the Fed, crude oil, long rates, and the potential economic impact of
both Katrina and Rita. My main concern continues to be that the Fed will
over-tighten as they did in 2000. Only this time, the damage could be much more
widespread, given all the leverage associated with real estate. As such, if the
Fed continues to maintain such a hawkish posture, the downside for stocks could
be significant. However, with the next Fed Meeting over a month away, there is
plenty of time for things to change.
The other 3
issues highlighted above are critical, but they will likely take a back seat to
the Fed. Crude oil has shown signs of topping lately. Nonetheless, with the
current price of gasoline, not to mention winter on the way, energy prices could
continue to eat into consumer spending. As for long rates, they are quietly
moving up once again. This, in turn, could put further pressure on the real
estate market. One of the main reasons for the recent rise in long rates likely
stems from the potential inflationary impact of the hurricanes. Not only will
the rebuilding cause the prices of certain raw materials to spike, but the
billions of dollars in extra government spending should add liquidity to the
system. While this liquidity should help economic growth in Q4 and Q1 of 2006,
it’s more likely to cause further concerns over inflation. Given the current
situation, it’s difficult to make a case for a large move in either direction
for equities.Â
    
Â
Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran
Â
Â
Â
Â