Q3 2010 in Review

Since the end of this week roughly coincided with the end of the quarter, it’s a good opportunity to change things up a bit and have a look at the 3rd quarter, with a bit of a longer term perspective.

Stocks enjoyed their best September since 1939, but remained below the April peak. There are some interesting technical points we can see in the SPX chart, and we have some mixed signals. First, the post-crash recovery that began in March 2009 and ran for 13 months presents a textbook example of a five wave movement as described by R. N. Elliott. After the end of wave five, we’ve gone into a sideways correction that has produced a ~38% Fibonacci re-tracement of the entire five wave movement. The SPX then spent the quarter just ended coming off that 38% correction and is now consolidating just above a summer trading range between 1030 and 1140.

Now let’s consider the volume, especially the volume bars inside the ellipse I drew on the charts. Much more red than black. Turning from Elliott to W. D. Gann, this has the hallmark of distribution. Going all the way back to December, volume has been stronger on down days than on up days  after – and this is key – after the end of a strong directional move. But here again, September has brought a firmer tone, even if volume is less than inspiring.

(click on charts to enlarge)

Turning to bonds, there isn’t much to say that hasn’t already been said; we should simply point out that directional changes in Treasury yields signaled the beginning and end of the stock rally very nicely

Now let’s put up a chart of gold. OK, here there really isn’t anything to say. Gold is in a world of its own. Either you like it or you don’t. Either way, it’s an impressive chart.

Now let’s turn to the US Dollar. Here we’ll let the chart and the annotations speak for themselves. What I think I have shown here, is that the greenback has been calling to tune to which the markets dance (well, perhaps except gold). You may buy it, or not, but I find it reasonably convincing. Here the question is whether support firms up or it keeps falling toward previous lows. Obviously the former should be bearish for stocks, and the latter bullish.

Finally a look at oil prices. Oil bulls are feeling, well, bullish about the quarter ending with a close above $80. On this chart, we step back and see that oil is still in a year long trading range, following the huge sine wave like price movement of 2008-09. To me, that’s not much to get excited about, unless you are a short term trader.

Overall, my position is cautiously bullish on stocks, but ready to exit at the first sign of trouble (or the Dollar finding support). Bonds are a poor risk/reward proposition, gold is too dangerous for me, and I don’t see much prospect in oil. That’s my take; your mileage, to use the trite phrase, may vary.

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