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Market Changes Character


Yesterday was one of those days when all asset classes had problems: stocks, commodities, gold, you name it. It was a classic “Risk Off” trade and contrary to recent Risk Off trades, the dollar fell in concert.

I thought you all might like to see the technical graph I follow that helps me get a feel for the direction of the market.

In the graph above, I have noted a few things with annotations that are important to follow. You can see that in the top section (the RSI indicator), we were in a severe overbought state based upon Relative Strength. Anytime the market exceeds the 70 level, we are in overbought territory and those situations either rectify themselves with the passing of time or a fall in prices. Yesterday we had the first 1% pullback since November.

In the middle section (the Summation Index) I’ve drawn a few circles around some crossovers in the indicator and its moving average. You can see that whenever the black line crosses the pink line we have a movement from overbought or oversold status on the RSI – in the case of the pink circles we have a price adjustment in the market – in the case of the blue circle, we have a passing of time. I thought you might find it interesting to see how overbought situations adjust themselves in both scenarios – particularly since the black line crossed the pink line today.

The other important thing to see in the middle section is the relationship of the black line to its history. You can see that it has not approached the November peak in the indicator, which shows that the current trend coming out of the November sideways market was less intense than the previous trend. This middle section represents the intermediate trend of the market.

The important thing to see in the bottom section (the McClellan Oscillator) is that we had a near-term trend that was weakening and has turned negative, dropping below the zero line.

Given that we have a steady stream of money coming into the market based upon the liquidity stream coming out of the Federal Reserve, I’d anticipate that the current weakness will be limited and will provide an opportunity for buyers to step in at lower prices than on Tuesday.

The current situation with the Federal Reserve’s Quantitative Easing program is unprecedented in terms of how it will impact our market – but if we look at Japan Nikkei, they have a long rally in their index as long as their program was in operation. I expect that we will follow that model, but we will continue to watch our indicators to give us a feel for where the market is headed – and share that with you here on the blog.

In honor of the recent midnight tax increase in Illinois that wasn’t accompanied by any serious consideration of spending cuts, I thought the following video from the recently deceased Gerry Rafferty might be appropriate (a friend pointed out that in the photo of the swearing in of the current batch of legislators there were roughly $3,000 of roses in vases – the day after the tax increase – amazing, really):

Click Here to Watch the video on You Tube