Fears of a meltdown in China's economy continue to contribute to the overall bearishness; concern over U.S. interest rates, with a first potential hike penciled in for September, is also part of the mix. Until U.S. interest rates are normalized, U.S. stock pricing will remain under tension.
Some technical indicators, including the dreaded moving average death cross, are flashing sell signals. As one portfolio manager said to The Fiscal Times, “People are still nervous about overseas and what might happen tonight” when Asian markets open for Wednesday's trading. (The quote is found in this article and in this one.)
That general consensus echoes the old trading maxim that it's better to be out of the market and wanting in, rather than in and wanting out.
In the last post, I promised a discussion on moving averages. They're a simple indicator based purely upon mathematics, where selected prices P (often the closing price) are averaged over time period X. Such an average price becomes moving when, for each day on the chart, the last price P is removed from the calculation and the new day's price is added in.
For example, a five-day moving average would look like this:
Moving averages are very valuable to traders because they illustrate, with their simple lines, the chart's actual trend, which can be amazingly hard to see. A moving average with a long lookback time changes direction more slowly than one with a shorter lookback, so traders who like to close their positions each day rather than leave anything open overnight will be more concerned with five-, ten-, or twenty-day moving averages. Investors who buy and hold generally give more weight to the MA-250, which tends to move very slowly indeed.
Courtesy of the Wall Street Journal, here's the DJIA one-year candlestick chart with the MA-250 (lower line) and the MA-50 (upper line) superimposed.
At the chart's left side (above), it's easy to see how the MA-250 is trending higher. On the right side, the upward trend is vanishing and the MA-250 is leveling off.
Of most interest is the fact that the MA-50 is crossing below the MA-250. Although it's difficult to see on the chart, for the DJIA the crossover actually happened during today's U.S. trading session, and the MA-50 (at 17,618.55) is lower than the MA-250 (at 17,630.23). That crossover of a long-term moving average below a medium- or short-term one is called the death cross, because it illustrates downward pressure on prices — downward pressure that's already happened (remember, lagging indicator).
I would not be surprised if the bulls and optimists decided to contest that crossover tomorrow. A resurgence of buying pressure, with bargains being snapped up, can raise tomorrow's MA-250 back above the MA-50. Especially if the Chinese government takes another stand, or if a spokes-type for the Federal Reserve dials back expectations for a September rate hike, it could happen. Personally I wouldn't put any money on it, but five years ago I realized I did not understand the market on zero percent interest rates (still don't) and I bowed out of it.
The bears, pessimists, and perma-bears will not see them as bargains to be snapped up.
This is a two-day Dow line chart, courtesy of an earlier edition of the WSJ and with two red-line additions of my own.
Yes, I know. Yesterday's marked-up chart plus a couple bucks might get me a cup of coffee in a cheap joint. Now, if I'd marked up that chart 24 hours ago, that would be another matter entirely… say, has anyone checked the Fibonacci ratios against that last dogleg down?
Thanks for stopping by. Cheers and happy reading,