Stocks Rally in Short Term Reversal

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.


After hitting a lower low on the open, U.S. stocks reversed their sharp downturn in late afternoon trade yesterday. The rally so far is an expected oversold bounce.  There is no reason yet to think that it will turn into something more significant.

Technicals, not fundamentals are driving stocks at the moment. Tuesday's action was an attempt to resolve an oversold condition from Friday the 14th. Seven trading days later, the major indices - the Dow Jones Industrial Average, the S&P 500, the Nasdaq and the Russell 2000 were all substantially lower. They were also well above their respective 200-day moving averages on the 14th, but all were below their 200-days yesterday.

The 200-day is the key dividing line between bullish and bearish behavior. With the exception of the small cap Russell 2000 (which is holding up best in the sell off), the major indices have violated their support at the 200-day twice in the recent sell off. The first time was during the odd crash on May 6th. Many considered the intra-day drop below the 200-day then to be a mere fluke. In the last five trading days though, the Dow, S&P, and Nasdaq have again traded below the key 200-day line at least part of the day. 

Stocks are also trading to try to fill gaps (a price range where no trading took place) in the charts. This usually occurs within a few days, although weeks and even months are possible time frames. There was a large down gap in trading on May 20th and another one before that on May 14th. The market will want to rise in the near term to at least fill the gap on the 20th. Yesterday's gap down was a short-term exhaustion gap (a gap after many down days or up days) and the markets moved up to trade into the empty space that had been left on the charts.

Technical factors are moving the market up at the moment, but once they get resolved, stocks are likely to head down again. The fundamental problems that emanate from the eurozone have not been fixed. For a major bottom to be put in, some dramatic event like a Greek default or Greece being removed from the euro currency union would be a good signal for a bigger rally. A much larger bailout, such as $5 trillion instead of a mere $1 trillion would pump up stocks as well. This is what reversed the markets during the Credit Crisis and the central bankers and treasury departments of the world will almost certainly attempt their tried and true money printing solution again. The only question is when they will do it.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Market Continues Choppy 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.


Choppy trading is a sign of a troubled market. Within the last ten days, U.S. stocks have had a great deal of difficulty deciding which way they wish to go. As of today, the Nasdaq has either gapped up or down seven days in a row on the open. Intraday gaps, which are very rare and indicate a great deal of volatility, have also occurred.  This type of trading usually takes place at market tops or bottoms.

The problems in the U.S. stock market began intraday on Thursday, May 6th with the sudden market drop and rise around 3:00PM. In a span of approximately 16 minutes, there were multiple gaps on the downside and then multiple gaps on the upside on the major U.S. market indices on the one-minute chart. The Dow Jones Industrial Average moved 700 points in both directions in that short period. Fewer gaps appear on the five-minute and fifteen minute charts, but they are more pronounced. This was followed by a noticeable intra-day gap on the downside on all the very short-term charts on May 7th. Then there was a massive gap up on the open on Monday, May 10th, with the Nasdaq opening around 100 points higher than its Friday close. The ECB (European Central Bank) has admitted to a massive liquidity injection at that time and this money flowed directly into the stock market. Other central banks were probably involved as well.

Looking at the charts it can be seen that Nasdaq then gapped down on Tuesday, up on Wednesday, and down on Thursday on the open. The gap down on Tuesday was significant, but the other two were relatively minor and not really out of the ordinary. Then last Friday, there was an almost 30-point drop on Nasdaq when stocks began trading. That is very much out of the business as usual range. After that, there was a small gap on Monday and a somewhat larger gap up today. The market suddenly turned around in the middle of the day yesterday while trying to fill the huge gap from May 6th. This is atypical behavior (the gap was only partially filled) and has all the earmarks of central bank interference.

Markets like to trade in continuous patterns. When gaps occur, they almost always get filled (trading takes place in the price range that was skipped because of the gap). This commonly happens within a few days, but it can take weeks, months or even years.  Investors in general don't like choppy markets, although they are a boon to short-term traders. Trending markets tend to have smoother price movements and investors should be on the lookout for a return to this type of less volatile environment.

Disclosure: None

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

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.

Market Sells Off as Dollar Rallies...As Usual

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.

Our Video Related to this Blog:

The U.S. dollar is rallying today for a change. Yesterday DXY, the ETF that represents it, fell as low as 75.83, below key support at 76.00. As of this moment DXY is 76.73. There is strong resistance at 78.00. The key breakdown level is 78.33, which was the multi year low made during the dollar sell off in the late 1980s and early 1990s. For the last two years the U.S. dollar has usually illogically rallied the day after the Fed meeting. There is also danger that some statement will come out of today's G20 meeting about the desire for a stronger dollar. If this happens, the talk is unlikely to be met with any action.

Gold was strong first thing in the morning, but sank to below a $1000 as trading progressed. Silver was selling off even more and may have resolved its overbought condition. The key breakout level for gold is $1003.50. It has closed above this level eight days in a row. So far, it doesn't look like today will be the ninth.

A number of gold and silver stocks have gaps made approximately ten trading days ago. These gaps may have to be filled. Nova Gold (NG) filled this gap four days ago. It was trying to test it today. It is not unusual for a stock's price to fall somewhat below the bottom of a gap. This is frequently a very profitable buy point. Nova Gold has made a cup and looks like it is making a handle. Many gold and silver miners' charts have similar patterns.

About the only thing up in today's market is UNG. The Natural Gas report seemed bearish this morning. GAZ is down. Both UNG and GAZ should move together, but they don't. HZBBF, introduced in this blog 2 weeks ago now trades under another ticker symbol: HNUZF (special thanks to New York Investing member Joyce K. for first reporting the change). The new trading symbol can't be found on Big Charts yet. The symbol changed after a 5 to 1 reverse split. This split and the symbol change make no sense whatsoever. Both have made it much harder for the individual investor to trade natural gas. Perhaps that the idea.

NEXT: So Much for That Recovery

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

A Rally Frothing at the Mouth

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.

Our Video Related to this Blog:

Volume was relatively high on Nasdaq yesterday, but the price action went nowhere. Churning action like this is not a good sign and indicates lots of people are selling as other people are buying. As soon as the buyers get less enthusiastic, the selling pressure will drive the market down. This is only one of many hints that the current rally is heading for some trouble. The other obvious ones are the put/call ratio, overextended stocks, gaps, and resistance. There is also plenty of bad economic and corporate news waiting to be released and although the market has been ignoring it lately, at some point it will start paying attention to it again.

The put/call ratio is a contrary indicator and is only significant at extremes. It has fallen into the 0.5's range, not too far above the low for the last year, which is above 0.4. This level of put/calls indicates an excess of bullish enthusiasm and that traders are taking on too much risk. Still it is not impossible for the put/call level to hit a new low for the year and even if it that occurs, it doesn't indicate that the market rally ends the next day. It does mean the rally is getting long in the tooth however.

The market is also full of overextended stocks and there is extensive gapping going on. Once a stock starts to rally (let's define a rally as beginning with the 10-day moving average crossing the 50-day and staying above it), it is important that the price doesn't get too far above the 10-day moving average, nor the 10-day moving average gets too far above the 20-day (after it too has moved above the 50-day). The statistical phenomenon known as reversion to the mean is likely to kick into action when this occurs. The stock price will want to go back to the 10-day or even 20-day moving average (see a 3-month daily chart of HWD for a good example of this). The situation becomes ever more precarious if the stock gaps up while it is becoming overextended. This has happened not just once, but two or three times for some stocks lately. The market likes filling gaps and this adds another impetus for driving a stock's price down.

You need to keep an eye on major resistance areas. The Nasdaq is having trouble going higher because it is stuck at its 200-day moving average for the moment. The Dow and S&P 500 still have a way to go to get to theirs (currently around 9000 and 950 respectively). When they do, the entire market could start having trouble moving up. At the very least choppy action is likely to follow, if not an outright drop in the market (if it doesn't happen sooner, it will happen later).

If you have been in the market for the last month or more, you should have some nice profits. Don't let them disappear. Put stops below your positions or sell them if they have been going up too far, too fast and you have large profits.

NEXT: U.S. Unemployment 15.8%; Grade Inflation on Bank Stress Test

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


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.

Look for the Gaps

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.

Our Video Related to this Blog:

Gaps, in more ways than one, are the key to making money in this market. Gaps in logic of the media coverage and gaps in stock charts. We are at the peak of first quarter earnings season this week and you are seeing one media report after another with glaring headlines about how earnings are down for major companies as if somehow this is a surprise. What exactly was the press expecting to happen during the worst economic downturn since the 1930s? I am actually surprised that earnings are not down much more. The news is also leading to stock prices that gap up and down - sometimes two or three times in a week. This amount of choppy trading is unusual, but is great for making money trading, since gaps frequently get filled shortly after they are made.

Today we had earnings from big caps United Technologies (UTX), Dupont (DD) and Caterpillar (CAT). Earnings for United Technologies were down 28% and my reaction in contrast to the media's was, "Is that all?". Highly cyclical DuPont's earnings were down 59% and Caterpillar had a loss because of write offs. All of these stocks had have significant drops from their highs with CAT having fallen around 75% just in the last year alone. All in all, I would say the market has been anticipating a lot of bad news for a long time and has priced it into these stocks (and almost every other stock in the market for that matter). But does the media report, 'things not so bad, considering'? Not at all. The press coverage reads like the funeral scene from a Greek tragedy. You will also not read in most of the reports that these stocks are well off their lows. Why is that if things are going to be so bad in the future - the only thing the market cares about?

Hysterical media coverage is leading to short term panic selling on many stocks (and sometimes panic buying is taking place by the contrarians who are seeing the incredible bargains being made available). This has created very choppy charts that are filled with gaps. Unless you have a breakaway gap - a sudden move up (or down) to a new trading range, gaps usually get filled in the short term. When a stock has gapped down, it is likely to fill the gap on the upside later, so you can buy and wait for this to happen (two gaps down is an even better deal, usually rare, but common these days). I have also seen two or three gaps up. The stock is likely to fall and fill these gaps - and then you buy for usually handsome profits.

Helpful advice on making money in the market will almost never appear in the media (it is likely an accident if it does). What investors are more likely to get is this quote that appeared today from Noriel Roubini: "For people who say there are green shoots, I see only yellow weeds frankly," Roubini said from a conference in Hong Kong Tuesday. "It's not a true recovery. It's just a bear-market rally, it's a suckers rally." Roubini is an economist and not an expert on the stock market, so why is he being quoted. Has he ever made any money trading stocks? My guess is no.

NEXT: If It's Wednesday, It's the Oil Storage Report

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.