Wednesday, June 24, 2009

Technical Damage Continues; Fed Decision Today

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 stocks retreated only slightly yesterday, the drop was more significant than the numbers indicated. The market needed a rally to improve the technical picture, but is so weak it couldn't go up even a few points. The Dow closed below its 50-day moving average for a second day in a row and below its 200-day for the seventh day. The Russell 2000 instead of bouncing off of its 200-day moving average sank below this key support level. It broke support at its 50-day on Monday. The Nasdaq is the only index that still has an adequately healthy technical picture.

Despite press reports yesterday about the U.S. dollar rally and the potential negative consequences for gold, silver, and oil, the trade-weighted dollar dropped yesterday and closed at 79.89. This is not too far above its breakdown level of 78.33. A drop below that could send the dollar to around 72 pretty quickly. The much vaunted dollar rally that the press has been trumpeting was at its peak so far a 'huge' 3.6 cents off the bottom (you'll need to put your glasses on to see it). Examination of the DXY (the trade-weighted dollar ETF) chart, shows the 50-day moving average fell below the 200-day moving average in early June - a bearish sell signal. This negative news hasn't appeared in any articles I've seen about the dollar. When push comes to shove, the mainstream financial media doesn't like reality to interfere with the story it wants to tell the public. You need to keep that in mind.

While stocks and the dollar fell, light sweet crude rose yesterday and closed at 69.24. It is back below 69 this morning. The weekly storage report will be out today at 10:30AM New York time. Expect it to set the direction of oil prices for the next couple of days. Oil has suffered in the recent sell off, but isn't showing the technical damage of the stock indices. The exception is the drillers, which have really been devastated. Unless you think there won't be a need to drill for oil in the future, you should assume these are getting to major bargain prices.

The Federal Reserve has a two-day meeting this week and will be releasing an announcement around 2:30PM New York time. There is zero chance they will be tightening interest rates, although Bernanke made noises a few weeks ago about doing so this fall and draining liquidity from the international financial system was a major item of discussion at the recent G8 meeting. You would be justified in wondering what these people were smoking. It must have been some very powerful hallucinogen if they are seeing a sustainable economic recovery without continued government stimulus. The Fed's announcement today though could move the market one way or the other regardless of whether or not it makes any sense.

NEXT: Fed Knows Inflation is Coming; Oil Supply Slips Again

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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