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Dallas, TX
June 16, 2010, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Media Focus On 200-Day Moving Average Misses Other Key Points In Advance
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What's Hot Today: |  |
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U.S. stock index futures were pulling back slightly in early trading.
Asia and Europe were slightly higher. The stock market had a good day
on Tuesday, but needs to add to its gains steadily in order to restore
the bullish trend. Less than positive housing starts data made the
futures drop significantly, again showing how fickle this bounce may
turn out to be.
News For Thought
American arrested in Pakistan for "hunting" Osama bin Laden. According
to The Wall Street JOurnal: "An American construction worker who was
arrested with a 40-inch sword, a pistol and night-vision goggles in northwestern
Pakistan told investigators Tuesday that he wanted to kill Osama bin
Laden to avenge the 2001 terrorist attacks on the U.S." According to
the report: "Gary Brooks Faulkner, 50 years old, of Greeley, Colo., was
caught by Pakistani police Monday in the remote Bumburat Valley near
the border of Afghanistan's Nuristan province, where he apparently hoped
to find Mr. bin Laden. Police quoted Mr. Faulkner as saying he wanted
to avenge the victims of the attacks on New York and Washington. He was
carrying Christian religious books, according to Mumtaz Ahmed Khan, a
senior police officer in the northwestern town of Chitral."
Mr. Faulkner has renal failure and must undergo dyalisis three times per week,
according to his brother's remarks at a press conference held in Colorado. Mr.
Faulkner's brother, Scott Faulkner, is a physician, and told reporters that his
brother is not "a psychopath" or a "sociopath," but "a man on a mission." According
to the report, Mr. Faulkner's brother did not believe he was "going to see my
brother again." Oh, the intangibles in a Chaotic universe.
Euro rises on France and Spain "austerity" actions. The Euro has
been stabilizing lately. And some of it could be due to the action in France
and Spain. According to The New York Times: "The French government proposed a
series of measures Wednesday to rein in the budget deficit, including raising
the retirement age by two years and increasing income taxes on the rich. Spain
also was set to announce contentious plans to shake up its labor market Wednesday,
as countries across the euro area respond to investor fears about public finances.
In France, the minimum age for retirement will be lifted gradually by 2018 to
62 from the current 60, the minister for labor, Eric Woerth, told reporters.
The government had considered raising the age to 63." |
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Media Focus On 200-Day Moving Average Misses Other Key Points In Advance
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Other Signs Beyond Obvious Support Potential Furthering Of Stock Market Rally
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The mainstream media is gushing about the 200 day moving
average, but the real story should be the completion of the “W” bottom
on the S & P 500. For a couple of weeks, we have noted that the S & P
500 was rounding out a “W” bottom. It looks as if that “W” was completed
on June 15. That means the burden of proof has shifted toward the bears.
If they can overwhelm the buyers, the bears will likely win a significant
victory. At this point, we rate the odds of such a victory as no better
than 50-50. Two weeks ago the odds were overwhelmingly on the side of the
bears. That means that things have changed significantly here and that
anyone who is solely betting on this market declining could be in for some
tough days ahead.
Chart Courtesy of StockCharts.com
Anyone who’s read a book on technical analysis knows the importance of the 200-day
moving average. This is the line that divides bull and bear markets. And the
crossover above this key line on June 15 has caught the attention of the mainstream
media. CNBC’s anchors and guests gushed about it all day long on the day and
in the after hours.
To be sure, it’s better to have the S & P above the 200-day moving average
than below. And we’re happy about the crossover, since we’ve been writing about
the importance of this technical development for some time. The problem is that
when the mainstream media gets a hold of an indicator, the indicator can lose
its importance. This has happened with other indicators, such as sentiment surveys
and extreme magazine covers, which have lost their once reliable usefulness in
many ways.
But, even though the 200-day moving average is grabbing the headlines, the completion
of the “W” bottom (see chart above) is more tangible as it shows the drama of
the conflict between the bears and the bulls and how the bulls have slowly taken
the upper hand in the last couple of weeks. The first low, on May 25 is called
the momentum low. It had larger volume. The second low, the traditional “panic
low” came on June 7th, and true to form had less volume. Also important is the
fact that the RSI and MACD oscillators, both excellent technical indicators of
market momentum made a higher low on the “panic low” day. That is a positive
divergence and means that there was a whole lot less selling on the second low
than the first. That’s significant because it tells you that the sellers were
exhausted by the second low.
That the market took off on the first day after the “panic low” and that it hasn’t
really stopped its forward momentum is further confirmation that the trend has
likely turned to the up side.
What’s important about the 200-day moving average is that, despite the mainstream
media’s attention, it’s hard to ignore. And in the current era, where high frequency
traders program their computers based on very mainstream technical data, this
indicator still matters, as do the 20 and 50-day moving averages as well as Fibonacci
retracement levels and other useful tools. Since this market bottomed it has
acted in a very textbook like matter because of the computer trading.
Chart Courtesy of StockCharts.com
The market's breadth has also shown improvement. The NYSE advance decline (NYAD)
line has crossed back above its 50-day moving average, putting the indicator
back on the bullish side of the ledger for the intermediate term. The Nasdaq
advance decline line (NAAD) is less robust, but has also come off of its bottom,
at least supporting the notion that there is improvement there as well.
Chart Courtesy of StockCharts.com
Even more interesting are the volume relationships that have been present of
late. According to fellow Financialwire columnist Frank Kollar (www.fibtimer.com),
there have been four greater than 9 to 1 up volume to down volume days in the
last several months: Wednesday May 26, 20 to 1; Thursday June 3, 36 to 1; Thursday
June 10, 44 to 1; and Tuesday June 15, 23 to 1 before the market closed.
When the ratio of up volume to down volume on the NYSE rises above 9 to 1, it
is a sign of significant momentum. To be sure, this indicator is not as reliable
as it once was, either. The NYSE is now home to bond funds, some closed end funds,
and plenty of exchange traded funds as well as preferred stocks. These income
producing and derivative products can distort the volume figures. Yet, with four
such days in such close proximity, and with the ratios being so wide, you have
to figure that there was a good chance for actual 9 to 1 pure stock volume to
be included.
Nothing is certain. And this market needs to bring in more positive momentum
to hit critical mass. But it is looking stronger by the day. Trade carefully.
Conclusion
The media is only tapping into some of the positives for this market. But when
there are more than one positives ongoing simultaneously, the case for the bulls
gets easier to prove. And that's what seems to be happening right now, albeit
tenuously.
What the media isn't saying is that the 200-day moving average crossover on 6-15,
was not the final crossover, if history holds up. What is more likely is that
the market will pivot or hinge on this area for some time. It wouldn't be abnormal
for prices on the major indexes to move 3-5% above and below this line for some
time before finally settling on a trend.
That means that watching the action in the market's breadth, and in individual
stocks will be helpful as a gauge of where things finally end up.
Our point is that there is more to this than just one crossover above the 200-day
moving average and that there are other signs that point to a potential reversal
to the up side.
But that has yet to be fully confirmed, which is why our ratings lists are not
chock full of "buy" recommendations. In a market in transition, it pays to be
selective and cautious.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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U.S. Dollar Bull ETF (NYSE: UUP) In Full Correction Mode
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Chart Courtesy of StockCharts.com
The U.S. Dollar Bull ETF (NYSE: UUP) declines as the Currency
Shares Euro Trust ETF (NYSE: FXE) bounces back.
Chart Courtesy of StockCharts.com
Rumors that the European Union was looking to put together
an IMF package for Spain took the wind out of the Euro's
sails overnight. And the EU's denial of the report did
little to keep the Euro's bounce alive.
Yet, the Euro has bounced back above 1.22 on the dollar. And the bounce has put
a crimp on the advance in UUP, the dollar bull ETF.
In the short term, the dollar's pullback is more than halfway done, as the 50-day
moving average on UUP is approaching, and the RSI oscillator is nearing an oversold
condition. The reverse is true for FXE.
What's important here is that a strong Euro seems to be a positive influence
on the U.S. stock market. The bottom of the stock market closely coincided with
the rally in the Euro.
And that means that a whole lot depends on the Euro when it comes to stocks,
at least for now.
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