Why I Believe Stock Charts Are Leading Indicators

by: Tate Dwinnell

In my last weekly report I urged you to Not Be Greedy and take the gift as the indices pushed higher into resistance levels with little conviction on expectations of another Fed rate cut. Sure, a 50bp cut may have propped up the market for a bit longer, but the bulk of the rate cute hopes were priced in already. That was your cue to take some profit and think about adding some short exposure.

As it turned out, the Fed didn't surprise anyone by hitting the homerun with a 50bp cut (maybe due to the much hotter than expected inflation readings on Thursday and Friday), but had another trick up its sleeve, which proved to temporarily save the day and inject more liquidity, but more importantly a bit more confidence that the Fed will do anything to save the mortgage industry. However, confidence doesn't last long and more liquidity doesn't always work, so this market still finds itself mired in a state of uncertainty both fundamentally and technically.

I'm not an economist and prefer not to spend precious hours debating inflation, recession or if the Fed is doing the right thing. Those are all LAGGING indicators anyway. Remember, LOOOOONNNGGGGG before those calling for a recession are proven right, the stock market will have already tanked and WE will have already bagged big profits on the short side and looking to get long again.

With that said, I turn to the ONLY leading indicators available. The charts. What are they telling us? Generally, they tell us what the big fellas are doing. The Banks, the Pension Funds, the Mutual Funds and increasingly so, the Hedge Funds. Actions speak louder than words and the big fellas reveal their actions in the price and volume movements.

Unfortunately, there are times when the charts indicate more uncertainty. Just a few days ago, there was much more certainty that the market would drop. It was oversold and buy volume was diminishing as overhead resistance loomed. Now that we have pulled back some, I've become a bit more neutral but still giving the bears the upper hand. The onus is still on the bulls now.