Popular Stock Market Indicator Is Bullish

Includes: EEM, EWG, FXI, GLD, IEF, SLV
by: Chris Ciovacco

With a Fed statement coming Wednesday, many believe the bulls need a formal announcement of QE3, which may not be the case. The odds are extremely low the Fed does not deliver at least some market-friendly language in its July/August statement. It does not need to announce QE3, it just needs to hint at it. QE2 was hinted at in late August 2010, but not formally announced until early November. In 2010, the markets did not wait for the formal announcement (see chart below). As shown via the numerous weekly bullish signals in the remainder of this article, the markets may be following the bullish script from late summer 2010.

On July 30, we showed bullish signals from two easy-to-use indicators, RSI and moving averages. Today, we show bullish "crossovers" on the weekly charts of numerous markets using an indicator known as MACD.

Since it can give some powerful signals relative to a change in trend, MACD is one of the most widely used indicators by traders and money managers. MACD stands for moving average convergence divergence, which sounds intimidating. In the real world, MACD is very easy to use.

A bullish MACD cross occurs when the black MACD line moves above the red line. According to Dr. Alexander Elder in Trading For A Living:

MACD crossovers identify shifts in the balance of power between the bulls and the bears. When the black MACD line rises above the red MACD line, it shows that the bulls dominate the market, and it is better to trade from the long side. When the black line moves above the red line, it gives a buy signal (see green arrow below).

The S&P 500 Index (see below), like the Dow above, has an encouraging look to its weekly MACD. The MACD Histogram is also telling us to be open to bullish outcomes since it is rising (see blue bars).

Central bankers want to avoid deflation and create positive asset inflation to assist impaired global balance sheets. The recent signs of life in gold (GLD) also support the bullish case.

If you are a stock bull, you want to see silver (SLV) pick up the pace. In Short Takes, we often point out that weekly signals are more meaningful than daily signals. Therefore, a weekly MACD cross is something we want to be aware of and account for in our portfolio allocations.

The chart below can be thought of as the ratio of "risk on" to "risk off" (stocks relative to bonds (IEF)). The chart shows stock bulls have been gaining on the bond bulls. Some of the charts shown here have "locked in" an MACD bullish cross by closing last week with the signal in place. Some of the markets have not yet seen a weekly close with a bullish signal from MACD. If the signal carries into the end of a week, it is more important.

EFA is one of the markets that experienced a bullish MACD signal at the end of last week (a good sign). Since all indicators can be "whipsawed" or give false signals, it is important to have a "what happens if I am wrong" strategy in place.

You do not need to be an anchor at CNBC to know Europe has some financial problems. Notice how clear the bullish MACD cross is on the weekly chart of the Euro Stoxx 50 Index below.

If central bankers print more money, it may take some of the short-term pressure off Germany (EWG) to write additional bailout checks. The weekly chart of the German DAX below is a welcome sign for all risk assets.

Emerging markets (EEM) have been laggards for quite some time. When the laggards begin to perk up, it can be a sign a rally is in the cards.

Economic growth in China (FXI) has slowed noticeably in recent months. Chinese stocks have been significant laggards since late 2010. The FXI ETF below is trying to complete a bullish MACD cross. When laggards show some strength, their "bounce back" rallies can often be significant.

If the ECB and Fed disappoint the markets this week, the bears could be happy again in short order. However, given what we know today, the bulls still have the upper hand. If central bankers deliver this week, we will continue to favor foreign stocks, commodities, and oil. Our respect for the fragile nature of the bull's grip is reflected in a relatively small hedge (RWM) we are holding. We are willing to maintain the bullish course or increase that hedge in a headline-driven environment.

Disclosure: I am long FXI, EWG.