A Bullish Divergence for the Dow-Jones

The Dow-Jones average has remained range bound over the past few weeks. In spite of this, it is possible to see two things using technical analysis.

First, support has held after two tests. That's important, since it indicates that the negative news, etc. that drove the market lower both times was eventually overcome. Second, during this period a bullish divergence emerged, which is typically a leading indicator for the market moving higher, which it did after last Friday.

All of this can be seen on the chart below (click to enlarge):

Over the August to October period, the market was range bound, bouncing off support around 10,600. The RSI, which is a momentum indicator, showed that momentum was building, in spite of the return to support. That combination is, of course, a bullish divergence. Often, but not always, this will lead to rising prices for that market.

Let me conclude by stating the importance of the bullish divergence: it ended the possibility that the head and shoulders pattern had been formoing would turn into a significant reversal. So, FOR NOW at least, the market will likely move higher, fueled by the hope that the Eurozone will come up with a viable and systematic plan to end their problems. Remember the saying: buy on the rumor, sell on the news. So, no matter what the Eurozone eventually comes up with, there will likely be some sell off when that plan is released.

Welcome Back!

Welcome to the Fall 2011 semester.

This blog will have postings throughout the semester -- my way of communicating important information to you when we are not meeting as a class. Check in on the days after class meets, especially on weekends.

The past few years have been dominated by a severe and continuing financial crisis following a global recession. That recession was so severe (believed to be the worst since the Depression) that it took on a name: "The Great Recession." This semester, growth remains a major concern, as there is still considerable debate about whether or not the US economy will experience a double-dip recession. Whether or not this occurs, housing market weakness continues to be important, as are the financial problems in the Euro zone as are those of individual US states. One question that was a worry just a year ago, whether we might be flirting with deflation, has been eliminated. The focus has now shifted to how much inflation any further Fed actions might create. Remember, the fed funds rate, which the Fed has traditionally targeted, remains close to 0%. And the Fed recently pledged to keep it there until 2013! Will they now target longer-term interest rates? Stay tuned, as the semester progresses. We might even have an answer to this by the end of September.

As I stated in class today, by semester's end, you will come to understand that all of the factors we discussed and come to discover that these are actually interrelated. As the semester unfolds, you will observe the collective actions of the world's central banks, and whether their existing assessments prove to be correct.

For now, read all of Stikki Stock Charts for next Thursday and download the online notes for the technical analysis handouts I have written. If you get a chance, visit the web site: StockCharts.com. On the online syllabus I have added introductory material that will assist you in using that web site (we will be referring to it all semester).

If you have any questions throughout the semester, don't hesitate to e-mail me (llardaro@uri.edu) and/or stop by my office, Chafee 804. DO NOT LEAVE PHONE MESSAGES!!

Finally, if during the semester, you want to research the entire set of blog posts on a specific topic, click on its label beyond a particular post. The result will be a view of all of the posts that include that word as a label.

February 2011 Employment Report

The much anticipated employment report for February was released this morning. The expectation was for an increase of about 200,000 jobs, while anticipated changes in the unemployment rate varied over a wide range. Here is a summary of the report, and a link to the CNBC video discussing it.

Today's market action illustrated an important concept  -- the whisper number. While there are official expectations (the market consensus), often the market has already priced this expectation in prior to the data release. The result: the market rises in anticipation of the number, but sells off when the expected number occurs. This is the basis of the old saying: "Buy on the rumor, sell on the news." Markets often do this. I prefer a re-wording of this: "Buy on the mystery, sell on the history." The whisper number is an unofficial number, representing what market participants actually want to occur for the market to move higher. Going into today, the expectation was +200,000 jobs, but the whisper number was much higher: +280,000 - +300,000. Since today's number was well below the whisper, hitting the consensus value was anticlimactic, so the market sold off. Note, however, that prior month values were revised higher as well, so this month's number was actually better than the 192,000 reported.

An hourly chart of the Dow-Jones Average helps to show this (click to enlarge). Note how the first four hourly candlesticks were bearish -- solid real bodies, indicating that the close for each hour was below the open. The fifth hour candle was a doji, touching the prior low. Recall that a doji indicates a "toss up" in terms of momentum. That candle actually marked a turning point, as the final two candles were bullish, with the first of these constituting a bullish engulfing pattern of the doji. The final candle of the day has a wider range and a large real body.

Throughout all of this, the Dow Jones remained in the uptrend that began late February (see dashed line). While today's price action erased much of yesterday's large gains, some of those gains remained.

Not all of today's Dow Jones action was related to the employment report, of course. There was a vary favorable factory orders number (+3.1%), the most rapid rise in years. Adding a seemingly more rapid trend in employment and the improving factory orders, oil prices rose sharply. The price per barrel of oil (West Texas Crude) closed the day at $104.91, an increase of almost 3 percent compared to yesterday.

So, while the talking heads appear all too willing to believe that the market won't be able to rise with oil above $100/barrel, the fact that the uptrend in the Dow Jones remains in tact, would appear to contradict them. What will it take for oil prices to rise dramatically? As I stated in class a while ago, dramatic reductions in either oil production or shipping in the middle east. This could happen. For now, the markets have not priced that risk in yet.

NASDAQ Support at the 50-Day Moving Average

The market has now been in correction mode for a few days now. Focusing on the NASDAQ, as of last Friday, the RSI was in overbought territory and a Doji appeared. Since then, the NASDAQ has been lower. But it is important to see that sometimes a "psychological level" can provide either support or resistance. In the present case, the 50-day moving average has become support for this NASDAQ's pullback, as the chart shows (click to enlarge).

Note how changes occurred right at the (rising) 50-day moving average. While the RSI remains below 50, the traditional value above which a bullish trend is viewed to be in place, it does still remain above 40 -- a level that can be viewed as support during an uptrend.

Does the uptrend remain in tact? Remember that an uptrend means higher highs and higher lows. At the present time, the recent lows remain above the low from the end of January, so the uptrend is still in force. Also, note the increase in the RSI over the past few days. This too provides some reason for optimism.

The fate of oil production and shipping in the Middle East will ultimately determine whether the present support level holds. However, the February employment number will be released on Friday morning (8:30am). This will be pivotal. A very bad number then absent weather influences, will very likely cause support to be broken -- for now.

Tuesday, 2/8

Based on all the recent weather problems, we haven't been able to meet much since the course started. So, for tomorrow's class, make sure you bring the notes on Supply and Demand. Also, review this topic in your principles textbook, as we will be using this throughout the entire semester. You need to be very strong on this topic.

Friday, the employment report for January was released. It was perhaps the most bizarre report I can remember in quite some time. The "headline number" (+36,000) was far below expectations and appeared to be disappointing, yet in spite of this, the unemployment rate dropped all the way to 9 percent! Here is a link to this report on Econoday. You should also read about this in a more typical news story (this link is for MarketWatch). Essentially, weather played some indeterminate effect in the January jobs report. That report is the payroll employment report, which counts the number of jobs available (i.e., non-farm payroll). But, as last Friday showed all to vividly, there is another survey, the Household Survey, from which the unemployment rate is derived. The number of persons working, resident employment (weather doesn't affect the number in this survey), didn't show such weakness, rising by 117,000.

From what little we have had the opportunity to discuss in class up to this point, a weak employment report should (other things being equal) bring about lower interest rates. Yet that didn't occur, as persons looked below the "headline number" and found signs of strength (and weather-related reasons to look beyond this). Here is a story about the changes in interest rates that occurred. Try to follow this as much as possible at this point.

So, the overriding pattern in major "numbers" at this point in the semester continues to be the need to look beyond "headline numbers" and look at a release in a broader and more meaningful context. Fortunately, with all the snow days, you have lots of time to do this!

Welcome Back!

Welcome to the Spring 2011 semester.

This blog will have postings throughout the semester -- my way of communicating important information to you when we are not meeting as a class. Check in on the days after class meets, especially on weekends.

The past few years have been dominated by a severe financial crisis and a global recession. The recession was so severe (believed to be the worst since the Depression) that it took on a name: "The Great Recession." This semester, growth remains a major concern, as there is still considerable debate about whether or not the national economic recovery will falter. Whether or not this occurs, housing market weakness continues to be important, as are the financial problems in the Euro zone and with individual US states. There remains the question, albeit less pressing, as to whether we might still be flirting with deflation. The Fed can no longer lower the fed funds rate, as it is currently at (or near) 0, but will they continue with Quantitative Easing, attempting to hold longer-duration interest rates down?

By semester's end, you will come to understand that all of the factors we will be discussing throughout this semester are interrelated, and how the key four markets we will be focusing on interact. And, as the semester unfolds, you will observe the collective actions of the world's central banks, and whether their prior assessments prove to be correct.

For now, read all of Stikki Stock Charts for next Thursday and download the online notes for the technical analysis handouts I have written. If you get a chance, visit the web site: StockCharts.com. On the online syllabus I have added introductory material that will assist you in using that web site (we will be referring to it all semester).

If you have any questions throughout the semester, don't hesitate to e-mail me (llardaro@uri.edu) and/or stop by my office, Chafee 804. DO NOT LEAVE PHONE MESSAGES!!

Finally, if during the semester, you want to research the entire set of blog posts on a specific topic, click on its label beyond a particular post. The result will be a view of all of the posts that include that word as a label.