Well, another long pause between posts. There are times when market fundamentals and news will drive markets with technical indicators offering little help in trying to figure out which way the market will move next. The above chart is of the IWM, the ETF version of the Russell 2000. It has been a momentum leader for much of the upmove over the last couple of years. You can see how erratic the candles have been lately. The trend can still be considered to be up, at least according to the moving averages used here, but it has been a wild ride. This market started to break prior to the January 28th decline inspired by the events in Egypt. But then the momentum players and other bulls took the sell-off as a chance to get on board the bandwagon, and this index pushed up to test the 2007 high. Since the Libya situation began, with a more durable oil price implication than that of Egypt, this index has been flipping back and forth with violent swings. Of course the other indexes have been doing about the same thing, but this index, with its higher volatility, shows this more clearly. The indicator in the lower sub-graph is simply a detrended price line with a 10 period Bollinger band. This indicator helps to show cycle direction and sometimes identifies waning momentum, aka divergence.
There are many indicators that work very well at certain times in certain market conditions. But there are no indicators that work well all the time. And at a time like this when news is driving the markets, it is best to not rely too heavily on technical analysis to guide trading decisions. The current market is especially difficult. The fundamentals are not supportive, in my opinion, of the kind of bull market we’ve seen over the last couple of years. But the reality is that the market has gone up a great deal and part of trading is to not fight a trend however illogical it may seem. It seems the buying is partly inspired by near zero interest rates resulting in a situation where there are few alternatives to earn a return, most likely with much of the money feeding the trend that would normally be going into safer investments. Then there are the momentum traders who en masse can keep a trend going just for the sake of the trend. Both these conditions almost always end poorly. Now add an increase in oil prices to an already high unemployment rates and mix that in with an administration that is becoming more inept by the day, and that all makes me wonder why anyone would pile onto this bull bandwagon. Yet people are. On almost every dip in the market the buyers come rushing back in. Lately all it seems to take is a few pennies dip in the price of oil to encourage the buyers. When you watch the market tick by tick all day you can sense the urgency of the buying. In markets of the past the buying would seem labored like an uphill climb, and then the sell offs would be characterized by a sense of urgency. This market seems to be just the opposite. It’s eerie. Is this an aberration or something to get used to? I don’t know. Many analysts think it is an artificial condition engineered by the fed, and I’d have to agree. Be careful of the downside. It could emerge in a more serious way. One of these days a down candle might not attract buyers.
The above chart shows one of the big momentum stocks of this bull market. In 2008 (off the scale of this chart) the stock was trading under 20, and on Valentine’s Day of this year the stock almost hit 250. So it’s over a ten bagger. Today the stock just filled that big gap up from January 27th. The trend appears to be reversing, even on a big up day in the overall market. For a long time one could just buy all the pullbacks to the moving average lines and many would have worked out profitably. You can see the last couple of days the stock moved up to the declining moving average lines and has since fallen back. I’m only showing this stock as this pattern seems to be showing up in many of the favorites of the momentum crowd. And many of these stocks were very crowded with bulls. And of course when that’s the situation, something’s gotta give.