The final GDP report for 2004:Q4 was released today, indicating 3.8 percent growth. Examine the tables in this release and the chart of cyclicals (below). In the GDP tables, consider the elements most closely tied to real GDP growth that are cyclical.
Using this information answer the following question: Is the bounce off of 200-day MA support a one-time event, or is there reason to believe that the double top will not ultimately form? This is excellent practice for your final paper.
Wednesday, March 30, 2005
Short-Term Target for Dow-Jones
Today the Dow-Jones Industrial Average had a very good day, rising 135 points. Support at the 200-day MA has held.
IF $INDU is to keep rising, how high is it likely to go in the near term? To answer this, the Fibonacci retracment tool from StockCharts.com was used. The next target range is a 38.2% retracement, which occurs at 10,625 (see chart above). This is just below the 50-day MA at 10,660. After that, the target is 50% retracement at around 10,700.
Will the stock market resume an upward trend? To answer this, it will be necessary to also factor in economic data and trends. To the extent that inflation rises (the GDP consumption price deflator was revised upward in today's release) and this passes through to input costs, the profitability of production will be adversely affected. In that situation, what we witnessed today is merely an oversold bounce.
IF $INDU is to keep rising, how high is it likely to go in the near term? To answer this, the Fibonacci retracment tool from StockCharts.com was used. The next target range is a 38.2% retracement, which occurs at 10,625 (see chart above). This is just below the 50-day MA at 10,660. After that, the target is 50% retracement at around 10,700.
Will the stock market resume an upward trend? To answer this, it will be necessary to also factor in economic data and trends. To the extent that inflation rises (the GDP consumption price deflator was revised upward in today's release) and this passes through to input costs, the profitability of production will be adversely affected. In that situation, what we witnessed today is merely an oversold bounce.
Monday, March 28, 2005
Foreign Stock Market Symbols
For those of you interested in tracking foreign stock markets, here are the StockCharts.com symbols for selected markets (those usually reported on CNBC and Bloomberg):
$AORD - All Ordinaries Index (Australia)
$CAC - Paris CAC Courant
$DAX - German DAX Composite
$FTSE - London Financial Times Index (England)
$HSI - Hang Seng Index (Hong Kong)
$NIKK - Tokyo Nikkei Average (Japan)
Note: the behavior of these indexes will generally be diferent from country ETFs (for example the Japan ETF is EWJ, which behaves differently from $NIKK)
$AORD - All Ordinaries Index (Australia)
$CAC - Paris CAC Courant
$DAX - German DAX Composite
$FTSE - London Financial Times Index (England)
$HSI - Hang Seng Index (Hong Kong)
$NIKK - Tokyo Nikkei Average (Japan)
Note: the behavior of these indexes will generally be diferent from country ETFs (for example the Japan ETF is EWJ, which behaves differently from $NIKK)
Saturday, March 26, 2005
NASDAQ Range
The chart below shows the NASDAQ. To determine support/resistance in the near-term, you can use Fibonacci retracement, but this doesn't always work well when the high-low values are fairly far apart. As an alternative, I have used the Raff Regression Channel Lines tool from StockCharts.com (this is sixth top button from the right on the annotation screen).
Absent the Raff Regression Channel tool, the next possible target for NASDAQ is its 200-day MA at 1992.85. The Raff Regression Channel indicates a slightly different support level, the Raff lower bound of about 1960, which is fairly close to the short-term top from early October of last year.
Note that the RSI is displaying an oversold reading at present, as oversold as in late January. So, it remains to be seen whether we will be testing support. Also, the NASDAQ continues to underperform the overall stock market (S&P 500).
According to the Raff Regression Channel, resistance is currently around 2080 (its upper channel). A prerequisite for moving there is that the NASDAQ begin outperforming the overall stock market in the next few weeks.
How can you determine if this is likely? Examine the performance of some of the major components of the NASDAQ. Right now, the semiconductor stocks (SMH) might be ready to break out, which would bode well for the NASDAQ.
Examing the chart of SMH and see if you think it will likely break out. Follow its actual behavior over the next week or two and track the interrelationships between the SMH and NASDAQ over that period.
Absent the Raff Regression Channel tool, the next possible target for NASDAQ is its 200-day MA at 1992.85. The Raff Regression Channel indicates a slightly different support level, the Raff lower bound of about 1960, which is fairly close to the short-term top from early October of last year.
Note that the RSI is displaying an oversold reading at present, as oversold as in late January. So, it remains to be seen whether we will be testing support. Also, the NASDAQ continues to underperform the overall stock market (S&P 500).
According to the Raff Regression Channel, resistance is currently around 2080 (its upper channel). A prerequisite for moving there is that the NASDAQ begin outperforming the overall stock market in the next few weeks.
How can you determine if this is likely? Examine the performance of some of the major components of the NASDAQ. Right now, the semiconductor stocks (SMH) might be ready to break out, which would bode well for the NASDAQ.
Examing the chart of SMH and see if you think it will likely break out. Follow its actual behavior over the next week or two and track the interrelationships between the SMH and NASDAQ over that period.
Investigating ETFs
To see the stocks that are included in XLP, XLY, or any ETF, go the the American Stock Exchange web (www.amex.com ) site section for ETFs (on the left) and type in XLP or whatever symbol you are investigating in the upper right-hand box for symbol look-up. Move to the bottom of the resulting page and you will see the major stocks/industries represented in this ETF. Examine these and convince yourself that these are indeed the stocks/sectors of firms related to this type of spending.
Exercise
For extra credit - must be handed in at the beginning of class next Tuesday (3/29). No late assignments will be accepted:
Go to StockCharts.com and recreate the graph for each of the two EFTs discussed in the earlier posting below (XLP and XLY). Add annotations to each and provide a brief write-up (using Word) that evaluates whether the empirical expectations concerning these two ETFs from the earlier posting (a decrease in discretionary spending and a rise in non-discretionary spending) appear to be valid for the short-term. Use technical analysis along with current events and whatever is relevant to combining economics with technical analysis in your write-up.
Go to StockCharts.com and recreate the graph for each of the two EFTs discussed in the earlier posting below (XLP and XLY). Add annotations to each and provide a brief write-up (using Word) that evaluates whether the empirical expectations concerning these two ETFs from the earlier posting (a decrease in discretionary spending and a rise in non-discretionary spending) appear to be valid for the short-term. Use technical analysis along with current events and whatever is relevant to combining economics with technical analysis in your write-up.
Gauging Consumer Spending At Present
As gasoline prices have been (generally) rising, we can use generalizations from microeconomic theory to create some macroeconomic predictions.
In the short-term, the demand for gasoline tends to be price inelastic (see: http://www.uri.edu/artsci/ecn/lardaro/lectures/Elasticity_of_Demand.pdf ). As a result, when gas price rises, total spending on gasoline tends to increase (other things being equal). Given income in the short-term, this means more of total income will be devoted to gasoline and less will be available for other purposes (of course the level of income must be considered as well). As a result, income available for discretionary purchases can be expected to fall, lowering discretionary spending.
This microeconomic effect has the potential to slow the rate of economic growth, causing a decrease in discretionary spending and a rise in non-discretionary spending. NOTE: this is a TESTABLE HYPOTHESIS, not a statistical certainty. Also, the magnitude of the change in not necessarily large. We can gauge the actual impact by examining two ETF': Consumer Staples (XLP) and Consumer Discretionary (XLY). More about these in the next few postings.
In the short-term, the demand for gasoline tends to be price inelastic (see: http://www.uri.edu/artsci/ecn/lardaro/lectures/Elasticity_of_Demand.pdf ). As a result, when gas price rises, total spending on gasoline tends to increase (other things being equal). Given income in the short-term, this means more of total income will be devoted to gasoline and less will be available for other purposes (of course the level of income must be considered as well). As a result, income available for discretionary purchases can be expected to fall, lowering discretionary spending.
This microeconomic effect has the potential to slow the rate of economic growth, causing a decrease in discretionary spending and a rise in non-discretionary spending. NOTE: this is a TESTABLE HYPOTHESIS, not a statistical certainty. Also, the magnitude of the change in not necessarily large. We can gauge the actual impact by examining two ETF': Consumer Staples (XLP) and Consumer Discretionary (XLY). More about these in the next few postings.
Moment of Truth for 10-Year
To examine the long-term trend in a variable, it is often advisable to go beyond merely extending the range of daily charts or using weekly graphs. The chart below shows monthly data from 1995 to the present on the 10-year bond. Notice that at the present time, the 10-year rate continues to range within a symmetrical triangle based on resistance from 2002 and support from 2003. The most recent monthly high is touching the upper line (longer-term resistance). Also, the 9-period RSI is not yet in oversold territory.
Examine the graph and analyze it. (1) What is the likely path of the 10-year rate in the next month or two based on technical considerations? (2) Adding economic analysis concerning the way the "pieces" are moving and fitting together (remember our theoretical discussion of interest rates), does this conflict with your technical analysis conclusion or is it consistent with it?
This is the type of thing you need to be doing as you get farther along in the process of writing your forecast paper.
Examine the graph and analyze it. (1) What is the likely path of the 10-year rate in the next month or two based on technical considerations? (2) Adding economic analysis concerning the way the "pieces" are moving and fitting together (remember our theoretical discussion of interest rates), does this conflict with your technical analysis conclusion or is it consistent with it?
This is the type of thing you need to be doing as you get farther along in the process of writing your forecast paper.
Friday, March 25, 2005
Dollar-Euro Range
The $XEU chart below shows the Dollar-Euro exchange rate. I have added Fibonacci analysis starting from the high at the close of 2004 and the low in September of 2004. The Fibonacci retracement analysis suggests that $XEU will be testing 50% (at $1.284) retracement fairly soon. While the RSI (I used 9 periods here) is in oversold territory, is is less oversold at the present time than it was in early February.
An interesting chart pattern emerged as part of this analysis: note how the recent higher highs in February and March didn't see a bearish divergence in the RSI. Instead, the RSI showed a DOUBLE TOP, which is the moral equivalent of a reversal signal for the $XEU here.
An interesting chart pattern emerged as part of this analysis: note how the recent higher highs in February and March didn't see a bearish divergence in the RSI. Instead, the RSI showed a DOUBLE TOP, which is the moral equivalent of a reversal signal for the $XEU here.
RSI SETTING
In Stockcharts.com, the default setting for the RSI is 14 periods. I have found that in most situations, using 9 periods captures more of the correct overbought and oversold situations, and I recommend that you consider this.
Where 14 is preferable is often on stock indexes or some of the other aggregate indicators we refer to in 327. So, just check to see if 14 is working well or if it needs to be modified.
To change to 9 periods, simply overwrite the value of 14 next to the RSI row below the graph.
Where 14 is preferable is often on stock indexes or some of the other aggregate indicators we refer to in 327. So, just check to see if 14 is working well or if it needs to be modified.
To change to 9 periods, simply overwrite the value of 14 next to the RSI row below the graph.
Wednesday, March 23, 2005
Interest Rates and Exchange Rates
Looking at the actual relationship between interest rates and the dollar exchange rate over the last ten years, it is evident from the chart that these have been inversely related for much of the time period (contrary to what theory indicates). This is a good example of how EMPIRICAL relationships such as this can differ from the THEORETICAL relationship. Why is this true? The chart is only looking at these two variables. Other factors relevant to the exchange rate are also changing over this time period. Note, however, that these variables are not perfectly synchronized. This is readily apparent with the most recent bottom in interest rates, which occurred before the recent dollar bottom (and it is not clear at the present time whether this bottom will actually hold).
RSI as leading indicator
While macro courses always refer to a traditional set of variables as being the only leading economic indicators considered, one of which is the stock market, we recently saw a leading indicator of the stock market. The $INDU chart shows the recent daily behavior of the Dow-Jones Industrial Average. Notice that a declining RSI that was occurring as the DJIA attained a higher peak. This BEARISH DIVERGENCE is a leading indicator of future stock price declines.
Dollar Bounces
As interest rates are rising (perhaps too dramatically in light of events this week), this should help the dollar exchange rate to appreciate since actual inflation is not a problem yet (it could very possibly become a problem). The recent strength in the dollar can be seen in a longer-term context as well: it recently bounced off support from its levels all the way back to 1991 (see graph).
Fed Rate Hike
Just as the Fed raised the federal funds rate by another 25 basis points Tuesday (3/22), to 2.75 percent, the stock and bond markets adjusted abruptly. Clearly, the change in wording indicated of the Fed's statement (http://www.federalreserve.gov/boarddocs/press/monetary/2005/20050322/ ) showed a greater concern about inflation (something we had already noted in class). The following day (today), the CPI release showed higher inflation than what was expected. This time, however, the stock and bond markets did not react as they did the previous day. The Dow-Jones average closed around 10,450, the Euro closed at $1.30, down from $1.34 just a few days ago, and the 10-year bond rate was almost unchanged from yesterday (at 4.61%).
For those familiar with candlestick charting, today's market activity formed a "shooting star," which occurred at a resistance level, when the RSI was in overbought territory. From a technical perspective, this set of occurrences points to the likelihood that the 10-year rate may be resting at its current level in the short-term.
Only a few days ago, the Dow-Jones tested resistance at 11,000. That seems like a long time ago, even though it was a short-time ago.
Finally, oil prices dropped sharply again today. Had this not occurred, would the decline in the Dow-Jones been as small?
For those familiar with candlestick charting, today's market activity formed a "shooting star," which occurred at a resistance level, when the RSI was in overbought territory. From a technical perspective, this set of occurrences points to the likelihood that the 10-year rate may be resting at its current level in the short-term.
Only a few days ago, the Dow-Jones tested resistance at 11,000. That seems like a long time ago, even though it was a short-time ago.
Finally, oil prices dropped sharply again today. Had this not occurred, would the decline in the Dow-Jones been as small?
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