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Bad News Smacks Market But Shrugs It Off


Well today, we had some unexpected bad news from the Chicago Purchasing Managers Index. It came in at a reading of 46, down from 50, and below the expected 52. This caused concern that the economy is not on the road to recovery like everyone had anticipated.

As you can see from the graph the downside was contained by the 20-day moving average as it has been over the last several sessions. The middle green line on the graph, the dashed one, is part of an indicator I follow called the Bolinger Band. It represents the 20-day moving average and prices two standard deviations on either side of it.

In a healthy market, where prices are rising in a sustained uptrend, you will see prices trade within the bands, running up the top band, consolidating those gains within the upper half as the prices trade toward the middle band, then if contained, move back up to the top of the band. As long as the downside is contained by the middle band, this uptrend will remain intact.

The other thing you like to see as an indicator of potentially higher prices is the upper line pointing up and the lower line of the band curling up. Generally, this is a good sign – not perfect, but good.

So, if you have money in the market there is no reason to sell during this consolidation. You should protect it with some stop losses just in case some exogenous event or disturbing news shocks the market. That is our plan and one which we are executing.