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In the Din of the Market, Price Charts and Simple Technical Tools Are the Best Guides

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If Twitter streams were able to produce a market weather forecast, it would be something along the lines of "Positively Sunny With a Chance of Torrential Downpour." Meaningless.

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Social divergence is another arena where we are getting conflicting readings with possible market implications. All it takes is a quick scan of the headlines to see a rise in social friction here and abroad. Do a news search for these phrases if you need proof of social disorder: "Foxconn Riot," "Mideast Tensions," "European Protests," "Fiscal Cliff," and/or "OWS". It is difficult to quantify sentiment as well as gauge its direct impact on market pricing. Regardless, we can't ignore the significance of collective discord.

Bulls and bears alike have plenty of fodder to fuel their respective fervors. It is hard to argue with prices making highs, but can the trend continue in light of the increasing case otherwise? The short answer: Yes, it can. For related commentary dealing with the topic of overextended market conditions please reference Overbought or Not Overbought: Does It Really Matter? In a similar fashion, divergence at these market prices far from support zones justifies increased risk awareness, but in terms of setting trading strategy it can't be the center of our attention. Granted, we have seen recent distribution days where SPX peeks over 1460 early and is met with heavy selling the rest of the day. However, until price truly breaks down, we have to treat that action as healthy consolidation and be open to the prospect of prices grinding higher.

Above, I alluded to the atypical situation we are in. It appears that there are two massive opposing forces locked in battle– global liquidity operations (cash floods into equity markets) vs. a painful deflationary debt hangover (reduces all asset values). Nobody can predict the shorter term outcome of this financial tug of war. This chaos is likely to persist until either unlimited money printing outlasts the necessary leverage unwind or the mayhem of an unbalanced financial system overwhelms the determined central bankers. And if we try to contemplate what happens in the next stage when the central banks figure out how to undo their balance sheet bulges, the only sure thing is that market uncertainty is going to last for years to come.

Signals From Noise – Follow Price

So let's stay on task and circle back to our market classification. How are we going to best create our own market forecast amidst such turbulence? In the end, price is the impartial messenger. Without committing to the idea that markets are perfectly efficient, we can assume that over longer timeframes (weeks, months, years), broad index prices reflect collective information and that is enough to guide our unbiased calculations. We'll leave discourse on short term disruptions and inefficiencies for another day.
No positions in stocks mentioned.
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