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Tuesday, 1 September 2009

Major Markets: Stochastics, MACD and TRIX Are Telling The Story

Stewart Thomson says .....

  • Another week is underway. Last week the volume on the Dow declined again, even though the Dow was up for the week.

  • The Dow Transports failed to confirm the highs on the Industrials.

  • RSI (relative strength) on the daily chart has turned down while price has headed higher, a 2nd non-confirmation.

  • Notice the thick solid rising red trendline I've drawn on the Dow daily chart enclosed below. This is the "return line" to the blue trendline. Red equals supply. Blue equals demand. The red supply return line, per Edwards and Magee, is the line drawn approx parallel to the blue demand line.

  • While the longer term technical indicators like TRIX and MACD and are neutral, the shorter term Stochastics and Williams series are negative. Note the red and blue arrows on the right hand side of the chart.

  • There is a small head and shoulders consolidation pattern that has possibly developed. I've highlighted it with the small blue circles.

  • Given the background of the "screaming buy" MACD on the monthly chart, those shorting into this market need to be very meticulous about your outlay of capital. Take a look at the MACD indicator by itself on the Dow monthly chart, which is enclosed here:

  • My lead 4,8,9 and 8,16,9 series have already given buy signals. Price has arrived at the first level of resistance on the monthly chart here at the Dow 9600 level.

  • Where the market is going is one reality. Making money in the market is another. Most analysts and investors are focused on the first reality. The first reality is not the key to achieving the second one...

  • I mentioned several weeks back that I followed up my Dow 8000-6500 buy program with a short-selling program that I began at Dow 9000. We're at Dow 9600 now. Nothing is "off course" here. I have mentioned Dow 11,500 as the point where my last short-sell will take place, if we get there.

  • Question: Why Dow 11,500?

  • Answer: I have no problem carrying my short positions to Dow 10,000, Dow 20,000, or Dow 200,000. Because my long positions vastly exceed the shorts. I'm fully prepared to buy the Dow all the way to zero. Am I prepared to short the Dow to infinity? Absolutely not. At around Dow 11,500 the shorts would reach my threshold of 30% of my total Dow risk capital.

  • If you get into a situation where the market moves far beyond what you think is possible and you keep increasing your bets anyways, you could be wiped out. And millions of investors have had that terrifying experience.

  • When it comes to where the market is going, I like to think in terms of possibilities, as opposed to probabilities. When it comes to my market actions, I want no grey areas. My actions must be as near to a sure thing as is possible. Nothing is 100%, but I don't think I'm exaggerating to say I'm 99% sure of all actions I will take if the Dow moves up or down 2000 points in either direction from here.

  • Ironically, many in the gold community who think real hyperinflation is coming soon, are also short the Dow right now with large risk capital. This is a dangerous situation. In countries where hyperinflation has occurred, the stock market has often outperformed the rate of hyperinflation.

  • Maybe the stock market is rising now because we really are exiting the recession, for good. Maybe it's a bear rally soon to fail. Maybe the stk mkt is rising because hyperinflation is coming. That's not the question. The question is: Are You Prepared?

  • Sadly, we enter September, the weakest month of the year for the stock market, with most Dow shorts on fire. Think about that. We have arrived at the doorstep of the most likely time for the stk mkt to turn down, and the Dow shorts are barely hanging on.

  • My own view is that what is coming is a limited hyperinflation. Whether we transition into it in a few months, or whether it is years away, I don't know.

  • I do know I don't want to be caught naked short ANY major asset class in a hyperinflation.

  • If you are an amateur investor it is absolutely critical that you focus 90% of your efforts on price diversification. Not asset diversification. Buying a block of assets at single price points won't work, not if they all go down. Assets can go down and stay down for decades.

  • Insider selling in the stock market continues with the pace of a torrential downpour. On Friday Aug 28 Insiders dumped $95 in stock for every $5 they bought. Dow stock Microsoft has been one of the heaviest sold stocks by insiders over the past month. Bill Gates himself has unloaded about 20 million shares of stock in his own company. Microsoft stock has "only" soared about 70% in 6 months. Meantime, the retail crowd is lined up like kids in line for rock concert tickets. The world's financial advisors and their bands of millions of clients are back on the buy. In the greatest price chasing frenzy since the great depression.

  • This is a critical point: Bill Gates is booking profit on some stock. Not all. If you didn't buy any Dow into Dow 6500, should you really be naked short now with large amounts of risk capital?

  • The Dow 9400 area looks set to fail. If it does, what's the next target? Answer: I don't care. All I care about is that IF the Dow falls to 9300, I start ringing the cash register on what I shorted at Dow 9600.

  • Meantime, overnight the Chinese stock market experienced what was described as panic selling by Bloomberg News. I bought today. Of course, I'm prepared to buy all the way to zero in larger and larger size.

  • Here's a look at the FXI, the ETF of the "Chinese Dow", the Xinhua 25 index:

  • I expect the FXI to sell off and perhaps quite hard. Notice the 3 MACD series here trying to give a buy signal but instead rolling over. The FXI is trading at 39. I see that as 39 opportunities. I'm not a cheerleader of the Chinese communist government. I seek to provide REAL support, not talk, to Chinese industry by buying the stock market when most are selling. Like right now.

  • A lot of people in the gold community are watching natural gas. Keep in mind there is a big premium in the market price compared to the net asset value of some ETFs, but not all. I believe we may be in the midst of an unwinding of these premiums, or at least a reduction. Here's a look at two Natural Gas ETFs, one American and one Canadian.

  • The Canadian trust's market price is much closer to the net asset value. As of Friday the premium was about 2%. The US fund premium was about 19%. I'm not saying one is better than the other. What I am saying is that at times the premiums will enlarge or shrink substantially. This can take investors by surprise. Only a professional allocation of your capital into price weakness can protect you against a sudden decline in the premium, not jumping from one horse to the other in a panic.

  • There is nervousness and even the beginnings of panic and terror setting in on the Natural Gas community. Remember, major commodities carry much less risk, by definition, the closers they are to zero. If gold was one cent an ounce, your risk would be only one cent away from zero risk. This is a subtle concept. Do you understand it?

  • The lower the price of Natural Gas, the lower the risk. I'm accelerating my nat gas buy programs, not bailing on them!

  • Gold: One of the key drivers for gold is bonds. Here's the long term bond ETF with 2 key indicators, Stochastics, MACD and TRIX. I'm showing only the flagship 20,12,7 series for Stochastics, 12,26,9 series for MACD and the 15,9 series for TRIX.

  • Stochastics leads MACD, MACD leads TRIX. I'm personally not going to begin accumulating bonds until they break below 100. The interest rate simply isn't high enough to justify taking action. Regardless, the buy signal crossovers on the indicators now don't have the crisp sharp look I like to see, but they are there now nonetheless.

  • Rising bonds drive gold in the early stages of a major gold bull mkt. Falling bond prices can send gold to the stratosphere in the later stages, as money can flow directly from bonds to gold in a panic as rates soar. The current bond chart indicates bonds could be in a new intermediate upleg.

  • The US dollar appears to be being led by the bond market. The indicators are drastically oversold. But look at the green histograms on the MACD, which are very weak and rising in a shallow formation.

  • Gold shows the Stochastics, MACD, and TRIX all flat-lining.

  • The current position of the USD offers investors a NEAR PERFECT situation. Accumulate the USD on weakness, but not in size. If the USD fails here, the technicals suggest some sort of low is not far off. If that's not the case, you are accumulating the world's second lowest risk currency into weakness, but only in modest size.

  • At the same time, strength in the USD accompanied by gold weakness offers a spectacular opportunity to buy gold. I don't think that will happen. I think gold will shoot higher and a massive profit booking opportunity will unfold. A soaring USD would crush the stock market. Whatever happens, make sure you are prepared with both gold and US dollars on hand to take action. If gold soars you want to use that gold to buy SOME US dollars on dollar weakness. If the dollar rises, you may want to use those dollars to buy both gold and the stock market. Make SURE you are liquid with ample amounts of cash and gold.

  • With due apologies and full credits to the author


    Hard said...

    We all get bombarded every day with mails, morning briefs as to which stock we should pick and how will be the market trend today. Every time the brokerage houses will send the stock market tips as if we all are playing a gamble and need the tricks as to how we can win it. And anticipating as to how to do stop loss and at least will make smaller profits. What most of the investor do is they consider short term trading as the long term investment and believe as to how it can be doubled in a day. Buying a stock just because the price is low and some stock market tip you received that this will boom in the market today. What most of us do is that we all trade with money which we can’t afford to lose but the market always says that invest only that money which is in excess to you. All of these are the big mistakes which we commit every day in spite of being reminded every time that we should complete our home work for the next day.
    Things to Remember when invest in stock market:
     We believe that the fundamental says invest in those company about which you know completely , but that doesn’t mean you fall in love with a company and a particular stock just because you are familiar with it or it create news in the stock market every time. Most of us just try proving our fundamentals are right and for that we apply too many technical indicators on that stock. It’s not true that the stock will go according to its fundamentals and technical, many stocks behave opposite to their indicators, thus they do not guarantee as to whether it will go up or down.
     Investors jump to penny stocks as they immediately boom in the market due to rumors what need to understand is that the Penny stocks are very risky , and on this basis make your strategy as to which one to pick from that lot and how much to invest . The portfolio of the investor should be constructed in such a manner that it allots weight age to different sector and the sizes of the stocks so that the diversification is there and the risk can be mitigated. Therefore the weight age of penny stocks in one‘s portfolio should not be more that the 15%. This is to minimize the losses and to accumulate the profits also.
     Keep a watch on the industry of the particular stock. Most of the stock behaves according to their industry trend. Thus if in the budget the government committed to play large role in the infrastructure sector , all the stocks will go react as per the budget and the whole sector recorded the jump of 12% on the next day. But it might be the case that the industry is booming and the stock is going down, therefore along with Industry, Company information is also vital.
     Past performance of any company doesn’t not hold true or affect its future performance. Many of the Indian stocks which were heavy weight in the past few years and were considered the blue chip companies in this market are either bankrupt or have become extinct in the market. Thus continuous performance analysis and evaluation is important.


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