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Can You Trust a Market Acting Strangely?

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Consider numerous market tells, such as key stocks, indexes, and global events.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).


We have to distrust each other. It is our only defense against betrayal.

--Tennessee Williams.

As an emotion, trust is often considered to be higher than love. On the way up, the markets gave up enough reasons to trust the rally and then, immediately after the first two distribution days in April, we found several reasons to be suspicious of the action. For more on these instances, please see the Buzz posts How do you spell divergence? and Market Tells. (These notes have being reproduced at the end of this article for the convenience of non-subscribers.)

Minyan Vince wanted to know if my observation on anemic Russell action yesterday could be considered as the beginning of small-cap under-performance. I feel that as an intraday tell, it's certainly worthwhile to follow but to read more might not be necessarily timely from a longer-term trading standpoint.

In 2000-2002 and 2007-2008, even though Russell 2000 disengaged from S&P when S&P was close to highs, it held up much longer than S&P before giving way. So, while it proved to be a good tell for the major indexes, its initial weakness didn't necessarily translate into continued weakness! See the charts below.


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For what it's worth, it's still above its own 200-day moving average, and most other indexes have broken below this major average. So, I'd consider this along with the repertoire of other market tells such as:

  • Wilshire 5000 (broader)
  • Semis (Speculative arm)
  • Russell 2000 (Small caps)
  • Transports (in sync or not with Dow Industrials)
  • Banks
  • Key stocks
  • Several other market health indicators such as the Advance Decline line of various indexes
  • Then there are special "event monitors," such as the Euro, which has been the leading tell on European crisis.


How do you spell d-i-v-e-r-g-e-n-c-e? (4/30/10)

Do not look where you fell but where you slipped.
-- African Proverb

With Goldman Sachs (GS) all over the news today, let's look at one of the real culprits -- the percentage of stocks above their 40-day moving average.

If the indexes are close to their highs but a greater number of stocks are below their 40-day (this reads better -- the average of almost two trading months), it shows lack of participation from the broader market and signals a short-term relative divergence.

I would continue to monitor this significant short-term development. Meanwhile, all eyes are on the five-day lows, just around 1183, which is also incidentally an important lateral trendline support.


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Market Tells (5/12/10)

As Minyans know, I use "trading tells" that range from intraday to a few days to longer term, in addition to the usual tech analysis indicators.

For instance, in last Friday's mayhem there were divergences in Transports and Russell. That yielded a good intraday tell, as the market edged lower into the close.

Also, last Friday, there were numerous oversold readings, which usually look over the next few days. McClellan Oscillator flashed the most oversold readings in 23 years. The oversold readings buoyed the market once the worry of Black Monday was taken off the table.

On a more intermediate-term basis, we have confirmations/divergences from other market health indicators, such as the Advance Decline Lines. Before the dislocation in the market last week there was no divergence that I saw. It's important to remember that A-D line divergences don't always creep up before significant tops, even though they were belligerent in 2008. But after a decline last week and ascend this week, A-D line needs to be monitored going forward.

Currently, there are no major index divergence tells; the oversold readings have been exhausted after doing their bit and the longer-term tells are still in the process of shaping up. So, we rely on the more popular technical indicators and any special thing of interest. (Remember TED Spread?)

My concern today is that CurrencyShares Euro Trust (FXE) is headed to the all-important support level again. Indeed, the first tryst with that support was held, courtesy of a trillion dollars.

When there's a weak bounce from a strong support, it can mean more work on the downside. Last few times, this level withstood multiple onslaughts. But there was a bounce between the tests.

This time it's just hovering close to the lows. Obviously the markets aren't looking worried, but this is something I'm watching closely.


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No positions in stocks mentioned.

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