Bank of America may have lot of upside, charts

Bank of America (BAC) may have lot of upside going forward as two key momentum and strength metrics were raising as price was reaching towards new highs.

Both the RSI (upper chart) and MACD (lower) have been rising while BAC stock has been falling (middle). That is often a very bullish signal.

Both the momentum measure (MACD) and the relative strength (RSI) measures were on rise for a 5 week period, August through September, during which times the stock price was reaching new lows.

This divergence is a very strong positive signal that BAC may have more to offer then just the rally to the current $8 handle level.

If BAC could convincingly break out of $8.80, it could conceivably reach $10 very fast.

Next congestion level up would be around $11 but if breached upwards the strong resistance would be at $15 handle.

Time frame for these events, barring any unexpecteds, is 7 to 10 weeks.

Uncertainty may drag into late autumn

With the sell off in the stock market still unfinished, there is still a possibility, based on Fibonacci retracement lines, that the market may dip below 10,400. What’s more predictable though is that the uncertainty, after any major market low is reached, will be prolonged and it could drag well into late fall if not into 2012.

For example, last year’s market dip took approximately 2 months to consolidate a low, but also about that much to get the market to realize that indeed it is a low.

Going back little further, to the March 2009 lows which were a culmination of a 5 month long vicious sell off – and it took approximately 5 months to realize that indeed it is a major low.

Since then, bull market ran approximately 9 months before losing steam.

Another issue to consider is the viciousness of a sell off. The more drastic the longer it takes to consolidate and therefore longer for such low to be realized to be the bottom.

This current sell off has just begun and it is rather vicious which leads to believe that – while it is hard to predict where the lows are – the market is likely to go down into the 9,600 – 10,400 region on the Dow Index.

Then what?

Just like in previous sell-offs, we would look for some price momentum divergence to see if we have these matching thick green lines going in an opposite trend in order to give a more confident buy signal.

This process could drag for a while with a huge probability that it will spill over into late September.

What is more worrisome though and may provide additional support to the belief that there is more to go down from here is this massive price-momentum divergence from circa December 2010 until last month (marked out in yellow lines). If we assume that similarly sized price space has to be carved out in the opposite direction, we may be in for a real nasty.

Of course, everything is subject to change if any new facts arise, particularly those out of Europe or if the European debt mess spills over into China.

On the more immediate basis and today’s rally going into Friday, the question is just how many are willing to hold stocks over the weekend and wait for an announcement before Asia opens?

Sell off like 2010? Three problematic charts

Many analysts are drawing parallels between this year’s ongoing market sell-off with the one from last year arguing, by implication, of a repeat.

Here are 3 problematic charts that do not support this narrative.

Exhibit 1: Dollar vs 10 Year Treasury divergence

Last year, highlighted in the box, dollar was rallying while yield was dropping. This year, except for a brief moment in May, dollar is not diverging from the falling yield.

Exhibit 2: Copper vs. dollar divergence

Last year, copper sell-off went hand in hand with dollar strength. However, this year, copper sell-off is in tandem with dollar’s fall. This year’s sell off in copper may be for different reasons then the one last year.

Exhibit 3: MACD vs SPX divergence

Last year, MACD was heading lower for 3 months suggesting that last year’s April high in SPX was a major one. This year, MACD is going hand in hand with the SPX.

Having said this, the SPX chart looks ready for a dive to the 200 DMA at 1250 or so.

Flash Crash 2.0 anyone.

Divining the charts of the commodity carnage

What could price trends in various markets suggest to us as to where things are going?

Chart below is of copper and yesterday’s trading clearly broke below the 200 DMA and the next possible support is lower at 370 (then 340). The velocity of the price drop also suggests that the 370 may be reached fairly soon at which point any rally would look at the 200 DMA as a resistance level. Fibonacci retracement lines also support this view. Besides the dollar rally, there are also some fundamentals driving the price down, particularly high Chinese copper inventories and lack of credit there to fuel new copper purchases.

As oppose to copper which has a well defined price pattern, oil (WTIC) looks set for another $10 leg down and even there the price may keep drifting lower and into $70s.

As for the dollar, it is still not clear whether its recent rally is sustainable because both the 20 and 50 DMA momentum is down and the price is sloping down the long (200 DMA) price trend. So far, the dollar rally looks to have legs up to the upper Bollinger channel (about 76) which is also the short term resistance area made in November. This top may be reached fairly soon and at that point, dollar looks more likely to head down towards 72.

Some in the media are saying that the recent dollar rally is sustainable because of the anticipation that Fed will stop pumping money in June via QE2 thus ushering “quantitative neutrality”. Markets typically discount things 6-or-so months ahead, so this argument, month before QE2 ends, is little dubious.

Coal looks like its has placed a nice interim bottom, but its double top at around $52 needs to be taken out for this commodity to continue its upwards channel. There is lot of chatter about huge pending coal demand in Asia that can act as a catalyst for such a rally this summer. Two years ago, coal has seen bullish summer time price action while last year, coal held well during the summer sell-off and subsequently rose huge in the fall.

Of course, none of this is a perfect science, but sort of a suggestive guidance on possible price action to be expected, barring any black-swan events, which are increasingly turning white.

Charts Review

The Dow is carving up what could potentially be an Ascending Scallop in preparation of a retest on 12200 and if successfully establishing that level as a floor we could expect higher moves towards 13K. Similar patterns are expected with S&P and Nasdaq.

Transports really tanked on Friday but so far this index has been behaving in an anticipatory manner and often foreshadowed future moves on the major indexes.

Russell 2000 has been behaving the same.

Bottom line on major indexes: expect a rough ride this week with a dip, and possible pause as the previous ceiling gets established as a future floor.

Meanwhile, the Advance/decline line took a nosedive and its downward momentum supports the theory of a tough ride ahead.

As for oil,  I am still of an opinion that a significant short-term drop in price is ahead of us as all significant measures (RSI, STO) are in overbought territory although on the longer term scale one can argue that a bullish cup has already been carved up that is awaiting a handle.

Bottom line on oil: short term price drop, long term rise.

A sustained rise in oil prices can do major damage to the economy because the oil price commands a leveraged impact on consumer consumption that is already strained by rise in prices for anything.

Although the Fed calls this price rise “transitory” its macro impact is expected to be permanent.

Finally, 13K could be another ceiling that will be tested and bounced off through the summer with a potential to push into 14K by the end of the year by which time Fed’s “transitory” price increase could become permanently accepted as a stagflation threat.

Charts Review

All three main indices are bouncing against the ceiling – NASDAQ against 2800, S&P 500 against 1340 and DOW against 12400 with DJI and SPX forming concerning upsidedown hammer short-term price action.

Since the March lows, traders have tended to sell the market in the last hour as oppose to buying which they did during the December March rally.

The last hour selling could mean that the traders are skeptical of the events of the next day and want to book their profit now, and this skepticism (wall of worry) may be what in fact fuels the next day’s gain because these sellers reenter the market.

As a result we have step trading.

Two indicators that may foreshadow the outcome of such trading pattern in SPX is Russell 2000 and Dow Transports.

Russell convincingly broke through the previous 840 top with room to still go on higher. The break occurred after overcoming congestion between 820-830.

Transports cleared 5300 in one swoop but have formed that concerning toppy price pattern that red-flags the short-term.

The midterm horizon appears well as the McClellan Oscillator, at 53, still has the mojo but I would begin looking to book some profits after 60.

NYSE Advanced/declines line also lends support for upwards trend movement towards 1700 as does the % of stocks above the 50 DMA although this particular indicators is waiving a red flag as its 50 DMA is in the 200 DMA death cross.

Odds that a 30-Year yield will decrease this week are higher then the other way around with an implication that oil prices may attempt to bounce higher.

As for oil, a particularly noticeable divergence appears between the price and volume in the USO with nasty implication for the price. To that, at $43, USO is way above the 20DMA and about 10% away from the 50DMA whereas the 50-200DMA spread is about 8%. I would look to sell at these levels or stay aside from this trade.