Monday, October 24, 2011

Stop Watching Television!

Some business television programming could cause damage to your investing strategy. To-night I caught a portion of Howard Green’s Headline, and I was mortified by the doom and gloom vacant content. His guests were Dumb & Dumber (I think they go by Randy and Brian). These two wouldn’t recognise a bull market if it bit them on the ass. What babbling – Greece this, the Euro Zone that, the U.S. credit down grade, please! All this has no relevance to investing.

Almost every stock component in the Dow Industrials is a beneficiary of the global growth story. China grows a new Greece every year. A recent CNBC commercial has this wise tip, “opportunities don’t come gift wrapped, they come in storms.” Did you profit from the storms of 1973-1974, 1986, 1998, 2000-2002, 2008 and last summer?

Enough fundamentals, our chart today is the daily closes of the Dow Jones Industrials plotted above the daily closes of the Nasdaq Composite spanning that nasty May – August mini-bear. Note the highest recovery peaks that followed the August lows. Now look at to-days close – clearly above their prior highs. Higher highs mean advances. Just for more technical support look at the S&P500, Dow Transports and most of the SPDR sectors – all except SPDR Materials above the prior rally peaks. For more technical evidence take a look at CNR and UNP – both back above the 200 day MA.

Tuesday, October 11, 2011

A word on divergence:

A few posts ago I described the sudden and sharp decline in the Dow from the late July price peak through to early August to be a final Elliott “C” down wave. At this time investor temperament changed from bullish to bearish causing investors to stampede out of risky assets and into safe assets. Now after a late August advance and a September swoon, we found most of the major North American stock indices once again sitting at or just below their relative early August lows. The question was; do we hold, or do we fold?

What I look for technically during difficult times like this is divergence.

Divergence is a condition that occurs when two lines on a chart move in opposite directions vertically. A technician will traditionally look for divergence between a stock's direction relative to the direction of a technical study such as an oscillator or the MACD.
Divergence can also be observed when doing inter-market studies such as gold vs. the gold stocks, a large cap index vs. a small cap index or price vs. volume. There are two kinds of divergences: positive and negative which can be also described as a bull or bear setup.

Our chart today is the daily closes of the Dow Jones Industrials plotted above the daily closes of the US 10-yr T-Bonds spanning about 5-months. In this example I am comparing the Dow to investor fear as illustrated by the flight into U.S. Treasuries. Note the recent prices relative to their August lows. Last September 22, the 10-yr yield closed below the August 8 low and Dow Industrials closed above the August 8 low. This price divergence has created a bull setup because while investor fear was greater (lower bond yields) the Dow price was higher. This is bullish divergence.