Darshan's Blog

Darshan's Daily Market Ponderings

Market Strength? Divergences Say No.

Tuesday 10th November, 2009

Morning all!

Right seems the market has indeed decided on the full on ramp...although I also have another option that I am thinking could be in the works. We all know that I have warned about this market strength occuring to due to bears getting trapped and buy stops being hit - many time over the last two and a bit weeks. However, I also said that the ramp would be a fake and a new bull trap. The divergences that are present across the markets are worrying.

You see yesterday, was interesting - the Dow broke yearly highs and rose above 10,200. However, anyone notice the huge divergence with the SPX? It did not even break 1100 let alone new year highs. The Nasdaq, the Russells, Goldmans Sachs - all did not perform as well as the Dow yesterday. So what is going on? Seems to me like the Dow has been ramped up on low volume, to make the equity markets look healthy. It's easier to move a basket of 30 stocks than it is to move, 500 stocks. So for now, stay on alert - the SPX is shouting at us.Does this necessarily mean full blown crash coming ahead?

Not necessarily -.this week the US is auctioning off another $81 billion in treasuries, with $40bn auctioned yesterday and $25 billion in 10 year notes today - with the rest throughout the week. This makes me think, they need the markets higher, so that they can allow room for any sort of sell-off to encourage investment towards treasuries instead of equities.

In which case, remember that there is a gap to fill on the Dow at 10,333 from last year's crash and then they can take this down. I think the FTSE 100 and the SPX are showing relative weakness and the Dow is just catching up from being a laggard for the past month. What I am trying to say is that we could easily fill that gap on the Dow, and then correct lower to meet those lower numbers from last month, before an end of year rally.In fact, I would not be surprised to see a sell-off today from 10,250 - that would be the ideal trap for the bulls aiming for that gap above. All this again depends on the USDX.

Yesterday, we got a new year low by a whisker but the price still held up above the 74.75 support level. This shows how strong that level is. So al in all, if the USDX does bottom there, then the above scenario would turn into a full blown killer dive. If on the other hand, the dollar can be controlled, so that it delivers the dip scenario above and then makes a new low towards 71, then we could get that new high on the markets - towards 1121 on the SPX, 10500 on the Dow and 5500 on the FTSE 100. This would also tie in with the bull flag on crude oil, which is targeting towards the $85-88 area. Seems as each day goes on, the Central Banks prolong the inevitable unwind resulting from any sustained dollar strength.

So as you can see, we are in no man's land yet again but just treat yesterday's rally, as seriously suspect. I'm not convinced by it at all.

Hope this short note today, helps!

Happy trading!

Darshan

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