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http://www.joe-duarte.com
The Rear View Mirror Is Rosy But What Lies Ahead Is Once Again Murky
by Dr Joe Duarte
January 30, 2012
Caution, Awareness Of New Trends, And A Good Trading Plan Will Get You Through What Lies Ahead
The rear view mirror looks fairly good, but the road ahead is
once again getting cloudy. As earnings season winds down, GDP disappointed in
the fourth quarter, and Europe is once again looking uncertain, traders are
starting to hit the sell button.
Chart Courtesy of StockCharts.com
The Dow Jones Industrial Average (INDU) started showing signs of weakness last week, even as small and midcap stocks showed some relative strength. The Russell 2000 Index (RUT) and the S & P 400 Midcap Index (MID) moved higher last Friday, even as the Dow dropped over 70 points. Normally, we would consider that bullish. And if it remains in place, we will keep that stance. But now, as uncertain climbs, and the traditionally bullish month of January winds down, we have to be on our guard.
Chart Courtesy of StockCharts.com
The two big indicators to watch are the Nasdaq advance decline line (NAAD), and the Nasdaq Hi-Lo line (NAHL). Both of these indicators have been very positive of late. The rise in NAAD is a sign that more stocks are moving higher than those that are falling. That means that the odds of picking winning stocks rises.
Chart Courtesy of StockCharts.com
The rise in NAHL means that there is positive momentum in the market. In other words, more stocks are making 52 week highs than those making 52 week lows. Both Nasdaq indicators are better at showing the status of the stock market than the corresponding NYSE indicators. The NYSE statistics are polluted by the high number of bond funds, ETFs, convertible and preferred stocks that trade there.
Chart Courtesy of StockCharts.com
Other indicators to watch are the U.S. Ten Year bond yield (TNX) and the U.S. Dollar, especially in respect to the Euro.
Chart Courtesy of StockCharts.com
The key parameters are the 2% yield on the Ten Year Note and the 80 area on the U.S. Dollar Index. If bond yields start to climb again, as they had been, it would be a sign that investors are confident in the future of the U.S. economy, and its political system, at least in relative terms to the same criteria elsewhere, such as in Europe.
A rising dollar would be a sign that uncertainty is back on the front of the important factors affecting the financial markets. With the new worry being the potential default of Portugal, we could see a new round of price adjustments in all markets.
Conclusion
The bullish case for stocks could be yesterday's news as the fickle markets begin to worry less about Greece and more about Portugal. That means that if Portugal stabilizes, in a few weeks we could be worried about Spain, then France, and eventually Germany. In other words, we could be back into another messy trading environment for the next few months.
The way to play this is first to acknowledge that things have changed. Last week's indicators are not exactly as good this week, at least not without getting through the action in the next couple of days.
Second, each position should be viewed on its own merits. If it's working keep it. If it's not working then let the sell stop take care of the decision.
Third, consider hedging your gains by using ETFs that sell the markets short. See our individual sections for details.
Stock of The Day
Are We Witnessing A Bear Trap In The Currency Shares Euro ETF (NYSE: FXE)?
by Dr Joe Duarte
Shares of the Currency Shares Euro ETF (NYSE: FXE) are reversing last week's
gains in a hurry this morning.
Chart Courtesy of StockCharts.com
The Euro bounced last week, closing well above 1.30 to the U.S. Dollar and its 50-day moving average. That's the kind of action that the bulls like, a nice crossover above a key resistance level.
The problem is that FXE is giving back most of Friday's gains in a hurry this morning. It looks as if Greece is close to some kind of debt restructuring deal, although nothing is certain. But now, the market is starting to worry about Portugal, where many think the problems are actually worse than in Greece.
Of course, then there is Spain, France, and of course Germany, not to mention the smaller Eastern European countries where the structural problems are no less complex than in any of the places that are currently being noticed.
We have always remained skeptical of the rally in the Euro. But, now things are starting to get to the point where we are worried about the markets. If the Greece deal falls apart, things would get very negative, very rapidly.
To subscribe to Dr Duarte's market Intelligence reports, which are emailed daily
"before the open" to subscribers, please visit our website at http://www.joe-duarte.com
Contact information:
email: support@joe-duarte.com
Phone: 434 823-8181
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