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Monday, October 25, 2010

Post G20 Bust

 1185 is now proving to be a resistance point, despite the early breakout this morning. Had this happened after several down days, i would be questioning whether we had a key reversal or not, and that gives more ammunition to the argument that the market is near a top. CMF should look a little uglier tomorrow, considering the high volume and the close near the low of the day. One thing is certain: the distress in the financial sector is going to spread to the rest of the market, and it won't be long before high commodity prices hurt rather than help. That moment came in the summer of 2008, and it will happen again.

 The Nasdaq, despite a weak close, has broken out into a new trading range, but at this point it is at best questionable if it can stay there. Price relative is slowing down. Relative volume was a little lower here, which means, for one, that there isn't a lot of buying at these levels, but there isn't a lot of selling, either.

The Dow industrials touched the top of the range that I have for them, almost to the penny. That horizontal line on the price relative may be a key here: a break below that is a bullish indication, staying above it is bearish, based on the theory that the SPX will outperform the Dow during up trends, the Dow outperforming during down trends. At least that has been my observation for the last couple of years.

The Russell 2000 is usually a pretty reliable indicator: when it underperforms, the rally is weak, when it leads the rally is strong. It came out of the box in late August to lead, but has snce weakened. Last time I looked at the price relative, I noted the horizontal line and said a break would be quite bearish. It did break, but not for long. This is treanding sideways now, which tells us a whole lot of nothing.
It's all about the dollar now, and the commodities market shows it. This is the CRB, which has been pulling the market up for nearly 2 months now (notice the sideways price relative to the SPX, and, just for fun, the serious outperformance of XLF for nearly 6 months now). The problem here is pretty simple - these keep rising and commodities will reach a point where they no longer hold up the market, but start to hurt, as consumers again cut back in the face of rising costs.

I will have the new highs update shortly.

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