Monday, February 9, 2009

Short Term, the Market is Looking Better

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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While nothing has changed in the long term outlook for the U.S. stock market, the shorter term picture brightened from a technical perspective somewhat on Friday. Bear market rallies can come out of nowhere and can be highly profitable. They should not be avoided as is currently being advised by the never-made-a-dime-trading 'pundits' who are now pompously announcing 'the long-term trend hasn't changed'. This would be hard to argue with. However it is in the short term that you make quick money.

Examining many charts, you will find a common pattern of almost vertical drops without much or any relief rallies. These drops have gone on for 6 months or more (a common maximum period for selling). The trend has gone sideways for the last two months or so. If you look at moving averages you will see that they have become bunched together on the daily charts. Even looking at these charts for a brief period, it is sometimes impossible to differentiate the 10-day, 20-day, 30-day, etc. moving averages. Bollinger Bands have become very narrow. The tight moving averages and narrow Bollinger Bands frequently precede trend changes.

The Nasdaq is leading the other U.S. stock indices. On Thursday it closed above its bundle of moving averages on the daily chart and then rallied strongly on Friday to the top of its Bollinger Band. Similar behavior took place in early January and Nasdaq traded above the Bollinger Band for one day. That breakout failed however. While the RSI and MACD looked good at that time, the down trend pattern of the DMI was not quite resolved at that point. Things look better now and the moving averages are more tightly intertwined . There is still no guarantee of a rally yet though. The price needs to either ride upward with a rising Bollinger Band or jump above it. The moving averages need to start rising with the 10-day on top, the 20-day just underneath it, the 30-day just underneath that, etc. When the moving averages are all together as they are now even a short rally will start to create this pattern.

The other thing to pay attention to is that there were two major pieces of bad economic news lately - the GDP report and the Jobs Report. The Market rallied both days. When the market does this, the bad news has already been priced in. This doesn't necessarily mean a big rally is coming, but the downside risk during those times is actually relatively low and the upside potential is very high. In addition to the tech stock laden Nasdaq, oil, coal, and non-precious metals are starting to look interesting. The first thing you should be looking for before buying is a close above the 50-day moving average. You also always need to keep in mind that you need to take your profits when you get them.

NEXT: The Slippery Slope of Oil Media Coverage

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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