A look at the price per barrel of oil (symbol $WTIC) since the beginning of August (in the diagram below) strongly suggests that this market is in the process of completing a head and shoulders pattern. Notice how the 50-day moving average has acted as support for quite a while now (since June).
As a way to practice the material we covered the other day in class, see if you can draw in the neckline and find the lower price target. In order to evaluate the likelihood of the possible breakdown, look at other information in the diagram (below) and decide whether or not this pattern is likely to complete.
Sunday, September 25, 2005
Friday, September 23, 2005
A Riddle
As I watch the progress of Hurricane Rita, as has been true for the last month or so, as oil prices rise, interest rates (ex: 10-year bond rate) actually fall. Most people would think that since higher oil prices indicate higher future inflation, that should cause interest rates to rise.
Extra credit due at the beginning of class Tuesday: explain the underlying basis for this "strange" interest rate behavior.
Extra credit due at the beginning of class Tuesday: explain the underlying basis for this "strange" interest rate behavior.
Wednesday, September 21, 2005
Discretionary Spending -- Another Look
The size of individual bars, as well as where low and high values occur convey a great deal of information. The chart below shows XLY for the past few weeks.
Note September 6. Open is at the low, close is at the high of the day and trading occurred over a very large range. That is what a strong day looks like. Who won, the bulls or bears? Clearly, the bulls had control all day.
Now look at the bars for September 8, 15, and 16. Here, the market was indecisive. Trading occurred over a small range, and the opening value was almost identical to the closing value. Who was in control on these days? Nobody. A bar like this signals indecision by the market. In candlestick charting, these are called Dojis. A Doji at resistance points to resistance holding.
Now look at the last few days. Large bars, so there is a battle between bulls and bears moving price over a wide range. But, these days open near the high and close at or near the low for the day. Ouch!! That reflects weakness, with the bears clearly in control (remember from the earlier post that these also had large volume -- another sign of bear dominance here).
The only good news, and I must say potentially good news, is that the last bar was not as long as the earlier ones. This usually indicates that the downward momentum is weakening. It is not a guarantee that the market will reverse, however.
Further evidence for the downward momentum to be near an end would be an RSI in oversold territory (below 30), or a bullish divergence (price declining, but the RSI rising).
Another possible indicator of a bottom is large "tails" on the bars, where the daily low is far below the closing value, so the bulls had some ability to prevent the market from reaching much lower by the end of the day.
Note September 6. Open is at the low, close is at the high of the day and trading occurred over a very large range. That is what a strong day looks like. Who won, the bulls or bears? Clearly, the bulls had control all day.
Now look at the bars for September 8, 15, and 16. Here, the market was indecisive. Trading occurred over a small range, and the opening value was almost identical to the closing value. Who was in control on these days? Nobody. A bar like this signals indecision by the market. In candlestick charting, these are called Dojis. A Doji at resistance points to resistance holding.
Now look at the last few days. Large bars, so there is a battle between bulls and bears moving price over a wide range. But, these days open near the high and close at or near the low for the day. Ouch!! That reflects weakness, with the bears clearly in control (remember from the earlier post that these also had large volume -- another sign of bear dominance here).
The only good news, and I must say potentially good news, is that the last bar was not as long as the earlier ones. This usually indicates that the downward momentum is weakening. It is not a guarantee that the market will reverse, however.
Further evidence for the downward momentum to be near an end would be an RSI in oversold territory (below 30), or a bullish divergence (price declining, but the RSI rising).
Another possible indicator of a bottom is large "tails" on the bars, where the daily low is far below the closing value, so the bulls had some ability to prevent the market from reaching much lower by the end of the day.
Discretionary Spending -- Forecast??
The graph of discretionary spending (XLE) below shows a head and shoulders formation. This is a reversal formation (but there is no guarantee this will complete). To determine the "target" for completion of this pattern follow these steps:
1) Find the difference between the top of the head (here = 34.97, I will call it 35) and the neckline below it (=32.5). The difference is 2.5.
2) Subtract the difference of 2.5 from the right end of the neckline (=33 in the graph). This gives a downside target of 30.5.
This target implies that discretationary spending will test its late April low, which was almost identical to the current target value.
How likely is this to occur? Add support and resistance lines and over the next week or so, track whether a breakout above resistance occurs. That would imply the likelihood that the pattern will fail to complete.
Also, look at the two circled areas in the graph. What do these indicate. More importantly, note that the dramatic declines in the past few days have occurred with very large volume. That is usually consistent with more downside ahead.
1) Find the difference between the top of the head (here = 34.97, I will call it 35) and the neckline below it (=32.5). The difference is 2.5.
2) Subtract the difference of 2.5 from the right end of the neckline (=33 in the graph). This gives a downside target of 30.5.
This target implies that discretationary spending will test its late April low, which was almost identical to the current target value.
How likely is this to occur? Add support and resistance lines and over the next week or so, track whether a breakout above resistance occurs. That would imply the likelihood that the pattern will fail to complete.
Also, look at the two circled areas in the graph. What do these indicate. More importantly, note that the dramatic declines in the past few days have occurred with very large volume. That is usually consistent with more downside ahead.
Friday, September 9, 2005
A Good Reference (for now)
Not much happening on the economic data front. Data on import and export prices that was not paid much attention to as it was BK -- Before Katrina. There is, however, a very good article I came across that I would like you to read and use as a reference for detailing the likely after-effects of hurricane Katrina.
As we continue to build your macroeconomic proficiency this semester, it will be very informative for you to see how the post-Katrina assessments change and the factors that are responsible for these changes (in essence a forecast each time). This should also help with getting you ready to do your forecast papers.
As we continue to build your macroeconomic proficiency this semester, it will be very informative for you to see how the post-Katrina assessments change and the factors that are responsible for these changes (in essence a forecast each time). This should also help with getting you ready to do your forecast papers.
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