Tuesday, April 2, 2013

Technical Tuesdays

As the bulls pop the champagne bottles at new highs courtesy robust corporate profits and profit margins (both at historically high levels) and abundant liquidity (central bank as well as investor (a/k/a financial market liquidity) largess), it seems worthwhile to take into consideration how the equity market's action matches the headline rhetoric. Hence, this newly installed weekly segment - Technical Tuesdays.

Let's begin with 3 metrics - all centered around what I call the Divergences Principle - that can serve to illuminate the scene.

An important measure of the strength in a market's move is its rate of change. Another is whether the move is being joined (confirmed) by other markets.

The first chart illustrates the fact that we are solidly in a bull market with the long-term Mega Trend (a relationship between price and its moving averages) in bullish mode while the intermediate-term weekly MACD (a measure of momentum) also in bullish mode (shorter-term average above its longer-term cousin). Within this longer-term bullish picture are 2 more concerning shorter-term issues.

The second chart shows a marked deceleration in the upward thrust of stocks via its rate of change (ROC). Confirming moves are always much better served when price is matched with power.

The third chart features another, more serious, concerning factor - the divergence in performance between markets. Here we see the general (that's the US) marching ahead while the infantry (that would be everybody else) trailing. And while the granddaddy of all external divergence indicators, the Dow Theory, is in solid bull mode, it could be argued that in a globalized world (a world where currency factors, for example, play an important role), country markets may act more in tandem than they have in the past.

Investment Strategy Implications

When properly applied, technical analysis (what I prefer calling Market Intelligence) can provide meaningful analysis of what the financial economy thinks (and acts) about what happens in the real economy. At present, the longer-term indicators are in bullish mode with the prospects of a trend reversal months (if not longer) away. Shorter-term, however, there are sufficient data to suggest that stocks are poised digest the banquet it has enjoyed thus far this year.

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