Macro Month in Review/Preview May 2011

• Posted by Greg Harmon
• on June 1st, 2011

Last month in this space my Monthly Macro Review/Preview suggested that Gold and Crude Oil both looked to be heading higher in the next few months with the assistance of the US Dollar Index heading lower. US Treasuries were gaining some strength in the short run as they base off of the 9 year uptrend support. The Shanghai Composite Index appears to be consolidating while Emerging Markets head higher. Volatility looked to continue to be subdued if not historically absent. All this set up with the view from the monthly charts for SPY, IWM and QQQ to continue their moves higher in the coming months, with the possibility of a slight pullback or consolidation showing up in the view for IWM and QQQ.

The month began with the US Dollar Index strengthening, throwing everything into reverse. Gold an Crude Oil pulled back and Global Equity markets sold off. Treasuries did continue higher. How did the month end and what does it mean for the longer term view. Let’s look at some charts.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

Gold,$GC_F

Gold consolidated higher within the rising channel but below overhead resistance from the Bollinger bands, and the rising trendline at 1625The rising support line is steeper and now gives support at 1443 for June. Also notice that Gold is making further space from the Median Line of the Andrews Pitchfork and closing on the Upper Median Line. The Relative Strength Index (RSI) is elevated but not extended and the Moving Average Convergence Divergence (MACD) indicator continues to increase. With the Simple Moving Averages (SMA) all sloping higher the trend will continue upward. Resistance at 1575 and then 1625 may be tested in June.

West Texas Intermediate Crude,$CL_F

Crude Oil continues to be drawn toward the Median Line but printed a bearish engulfing candle for May. The RSI has spiked lower and the MACD is starting to wane. The SMA’s are all sloping higher though identifying the rising trend. Crude looks like it may consolidate within a range between 102 and 115.64 before heading higher. A touch of the Median line in June at 124.60 would signal a break out.

US Dollar Index,$DX_F

The US Dollar Index found support at 73 and rose until the end of the month when it pulled back printing the long upper shadow on the monthly candle. The RSI is rising and the MACD is steady, indicating that there may be further consolidation. But the trend is lower. On a tighter view the May candle retested the breakdown line and frees the Dollar Index to move back lower. There is support at 73 and then 71.50 before it is trading in uncharted territory. Look for further consolidation to occur and then a continuation downward on the monthly timeframe.

iShares Barclays 20+ Yr Treasury Bond Fund,$TLT

US Treasuries, measured by the ETF TLT, continued their run higher, printing a near Marubozu candle in May. The RSI is rising and the MACD is improving, both suggesting more upside. The volume is diverging though on this move higher. Look for more upside in the next few months with resistance at 98 and then the round number 100 before a test of last Summer’s highs at 105.40.

Shanghai Stock Exchange Composite,$SSEC

The Shanghai Composite broke the rising support line lower and is testing support of the 23.6% Fibonacci level from the move lower through 2008 at 2714. The RSI and MACD offer no guidance on the future direction. Flat as a pancake. The SMA’s are also flat. But the Bollinger bands continue to tighten. The combination suggests that the consolidation between 2714 and 2956 where it has been for the past 8 months will continue in June. The bias would have to be to the downside as it has now broken the rising trend line but not the falling resistance line. Sideways to down for the next few months.

iShares MSCI Emerging Markets Index,$EEM

Emerging Markets, measured by the EEM ETF, continue their trend higher although printing a bearish candle for May, holding over the 48.30 previous resistance level from 2008. The RSI is in bullish territory and the trending slightly higher and the MACD is flat but positive. It is slowly drifting higher and looks to continue the next few months.

VIX$

The Volatility Index continued in its downward channel but with the body’s of the last two monthly candles printing a bullish Harami, a potential reversal. Notice that the VIX has had a negative correlation to the S&P 500 and should the VIX reverse higher it would suggest the S&P 500 would fall. But it has some work to do before that can happen. The SMA’s are flat and all tightly bound between 20.64 and 22.44 and will provide resistance. And the Bollinger bands are expanding lower. Look for the VIX to continue to move sideways to slightly lower, with any upside spike limited to the 22.44 area.

SPY$

The SPY shows the uptrend intact with a touch and hold of the rising trend line. it is also now back with in the Bollinger bands after peaking over the top last month. It is showing some signs of tiring as the RSI is starting to roll and the MACD is leveling and slowly decreasing. The Measured Move (MM) sets a target of 156. Look for the trend to continue higher until it breaks the trend line.

IWM$

The IWM is beginning a consolidation pattern after holding support of the 81.50 top in 2007. It did print a bearish engulfing candle for May confirming the consolidation and perhaps a pullback to come. The RSI is also rolling and the MACD is slowly starting to fade. Both could be reversed easily though. Look for more upside until the support at 81.50 fails with some upside targets of 97 on a Measured Move and 111 on the Inverted Head and Shoulders.

QQQ$

The QQQ continues to consolidate above support with a slight rise to it. The RSI is pinned at 70 and the MACD is flat to slightly decreasing. Not enough to kill the uptrend but enough to take notice. Look for the uptrend to continue until the 54.26 support fails, with some upside targets of 67.50 on a Measured Move and then 75 on the Inverted Head and Shoulders.

So the outlook is positive for Gold and Crude Oil with a good chance of further consolidation for Crude Oil first. The US Dollar Index looks to resume its downtrend after taking a runner in May while Treasuries continue higher. The Shanghai Composite looks to move lower with some potential for further consolidation while Emerging Markets drift higher. Volatility looks to remain in check giving a positive environment for the Equity Index ETF’s SPY, IWM and QQQ to continue their trends higher, although all three are showing signs of tiring or consolidation to happen first.
Use this information to understand the long term trends in Equities and their influencers as you prepare for the coming months.

For details on a shorter time frame read the Macro Week in Review/Preview.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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