Markets still in counter-trend rally, Baltic Dry Index moving higher

The Baltic Dry Index has seen a huge drop in price over the last year or so. There has been a good percentage bounce lately, but the world cost of shipping raw goods is still a small fraction of the price a year ago. Downside momentum did subside as can be seen by the numerous sideways bars on the weekly chart to the left. A rally started from extremely oversold levels. That rally corrected, or tested, back down. That test held, and prices as of this last week have taken out the swing point, as can be seen at the horizontal cyan line. Note that during the re-test back down the stochastic indicator in the sub-graph continued to rise. The pattern presented here, that is of a rebound from oversold levels, a rally, a successful test back down, and subsequent break of the swing point, presents a bullish picture, at least on this weekly chart. On the other hand, the extend of the previous decline would suggest that the longer picture is that of a serious bear market. Counter-trend rallies obviously do occur and they are often interpreted as new bull markets. I think it is premature to think of this as a new bull market. There would be much work to be done to turn this around. So far, to my way of thinking, the rebound in the cost of shipping further supports more upside to stock indexes over the short to intermediate term. But I still view this in the context of a larger degree bear market. The bear likes to get all on board the bandwagon before the next leg down. Keep in mind that this index would have to double from here to even approach the first fibonacci retracement level of the entire drop, that is around 38%, which would still indicate a weak rebound within the overall bear market.

The weekly S&P etf is to the right. I drew a similar cyan horizontal line, with a similar set-up on this broad index. The previous pivot has not yet been taken out. It was approached this last week, but so far this week there has been some pullback. Momentum continues higher after the bullish divergence. I am using a longer term stochastic on this chart. It is the Stochastic Momentum Index, as opposed to the more sensitive double stochastic that I usually have on the charts. I’ve been trying to stand back a bit to get a little longer perspective. Daily signals have been somewhat more bearish, but there still seems to be a bullish tailwind over the intermediate term. It doesn’t seem that sentiment is quite bullish enough for the next leg down to begin. As with the comment on the BDI, the bandwagon needs to be more fully loaded.

It is difficult for the way I view the markets to take longer term positions when the three time frames are so out of synch. A study of stock market history will show many significant rallies within the context of major bear markets. These rallies are tempting but insideous. A well defined and constructed uptrend and suddenly fall apart and trap the believers in the new bull. There are many similarities with the markets and the political climate of today and during the great depression. Back then we had a government that prolonged the downturn with massive government programs. It appears we are about the repeat that failed experience. Politicians refuse to learn from history. There is rarely a time in trading that everything lines up perfectly. There are always many pieces to the puzzle of future market direction. The Baltic Dry Index, while imperfect for short term timing, is still an important piece of the puzzle, as is the longer term charts of the broad indexes. And it is essential to keep the political climate in mind, which has been my main worry since the election.

Also, another excellent article from my new favorite blog The Black Sphere, “Obama’s Fuzzy Job Math” post last Friday. Check it out, and bookmark Kevin’s website.