Front Running QE3 - Part 2

This article was published here Front Running QE3 - Part 2 at Seeking Alpha.

Market Watch August 18, 2012

Divergence:  Is when the price of an asset and an indicator, index or other related asset move in opposite directions.  Divergence can be seen as positive or negative.  Three charts below show of such negative divergences against the S&P 500 making new yearly highs this past week.  First lets show the S&P 500 chart making a new high for the year below.  Click to enlarge.

The first divergence is against copper.  Copper is a leading commodity that is used in almost every building project whether residential or commercial.

Next is the transportation index.  This index is the most widely gauge of American companies moving products.  Again we see the negative divergence.

Lastly, the BPNYA is known as the bullish percentage of stock charts in the New York Stock Exchange.  Basically measures the breadth of the stock market.  With the market making new highs, breadth should confirm or be close to also making highs.

Bottom Line:  The market has made a new high for the year this past week. But there are some negative divergences as seen from the three charts above. The market can continue to move higher despite these negative trends, but eventually the negative trends will catch up, and stocks will face a correction. We will be sellers as the market continues to trend higher and eventually may initiate a short position in the market when the time is right. Thank you for reading.

Market Watch August 12, 2012

Last week I commented on the markets being overbought from a shorter term perspective.  Last week some of those overbought readings were worked off. Not much has changed with the charts below.  But let's have a look at the 60 minute chart again.  A pullback to the 60 EMA shown below would be a decent entry point.

The daily chart below gained 1.07% last week, on one of the lowest volume weeks of the year.

The weekly chart below has not changed much either.  It is moving higher into the area where we may consider shorting.

Bottom Line:  In the past week the markets were neutralized, with a slight gain higher.  From a risk to reward standpoint, I would like to see the markets pull back some before initiating long positions again.  For now, it is a waiting game and being patient is what we need to be, until we get the move we are expecting.  Thank you for reading.