Thomas Friedman and James Chaos

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Earlier in the week, I did two interviews. Please see: http://watch.bnn.ca/trading-day/january-2010/trading-day-january-11-2010/#clip254197 and http://media.mta.org/podcasts/2010-JAN12-waltermurphy.mp3.

Errata: In yesterday’s post our head must have been in the clouds as we apparently overlooked (it was there) a row of data in our spreadsheet. We noted that, surprisingly, 2007 had more up days than down and that 2003-present represented a six year winning streak. The surprise year was 2008 and the winning streak is seven years. The errors of observation had no impact on our analysis. Thank you to the reader who pointed this out to us.

The S&P 500 recovered on Wednesday with an 0.8% rally. Breadth was positive by better than 4:1. The up/down volume ratio was positive by 5:2 but total volume fell by 11%. The daily Coppock Curve was positive for 13 of the 24 S&P industry groups.

In Wednesday’s New York Times, Thomas Friedman noted that James Chanos (a well known short seller) is looking for ways to short China. Friedman disagreed for a number of reasons and concluded by saying “Well good luck with that Mr. Chanos. Let us know how it works out for you.”

Separately a Google Elliott Wave group, without reference to the Friedman column, noted the weak relative strength pattern of China relative to the US. Unfortunately, that group used a China ETF.

Shanghai Composite Relative to the DJIA

All that said, the nearby chart, which compares the Shanghai Composite to the DJIA, suggests that we might be better of siding with Chanos and the ewave list. Last July’s relative high can be described as both a double top and the head of a head-and-shoulders top formation. Both patterns suggest that a breakdown through the lows of the past six months could be a significant reversal.

As for the S&P, our near term focus remains on nearby support at 1115-1114; A decline through that range would do much to lock in the rally from December 9 as a complete pattern, which would satisfy the minimum requirements for perhaps two larger wave degrees of trend. Until that happens, we will continue to give the current trend the benefit of the doubt. Second support remains at 1086-1085.

Meanwhile, there is still the potential for a continued challenge of the top end of our long-standing 1121-1156 resistance range. We will deal with a breakout if and when it occurs.