Thursday, May 27, 2010

Stocks Continue Volatile Trading

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

While day traders love it, volatility is never a good sign for investors. Money is made by following the trends and when wild swings up and down occur, there usually is no trend. Even if one is beginning, it's hard to discern.

Right now, stocks are attempting a relief rally to resolve an oversold condition. The market is still in a very vulnerable state. Any piece of news can whipsaw it up or down. Wednesday morning, the 'good' U.S. Durable Goods report helped send the Dow Jones Industrial Average up 135 points in morning trade. The headlines on trading terminals around the globe flashed that durable goods had risen 2.9% in April (excluding the volatile transportation sector, they were actually down 1.0%, but you had to read further to find that not so good news). Morning mania faded late in the afternoon however.

Before the U.S. markets closed, the Financial Times reported that China was reviewing its eurozone debt holdings. The Dow closed down at 9974. For the first time in months it ended below the key 10,000 number. When it went above 10,000 in October 2009, this represented a major breakout on the upside. It looked like the breakout was failing immediately afterwards and then again briefly in February when the Dow spent some time below 10,000 again. In neither case was the index below its 200-day moving average as it is now. We have already taken out the February intraday low of 9822 twice this month. The next step is an intraday number below 9647, the low in November 2009. A break of that level should be considered a sign of extreme market weakness.

Stocks are rallying smartly today however, with the Dow up more than 200 points in morning trade. China denied the Financial Times report and this made the markets jubilant. This is of course nonsensical since there is no way China would admit that it was selling its European debt. Doing so would cause prices to fall and it would lose a lot of money if it acknowledged this. Furthermore, China has a long history of operating in secrecy and admitting what it has done only years after the fact. But somehow traders think the wily Chinese are going to shoot themselves in the foot this time and admit to what they are doing in the markets.

The buoyant mood this morning caused the Nasdaq to gap up approximately 48 points. These large differences from the previous day's close have been common lately. They are also unhealthy. Gaps are usually closed within a few days. Professional traders tend to fade them (trade in the opposite direction). Professional traders also tend to trade heavily around the close as well. This helps explain the typical bear market pattern of strong opens and weak closes. That was certainly the pattern yesterday.

Disclosure: No positions.

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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