QE2 or Q2E? Ask the Dow Model.

So far this week, the Short Term Momentum Dow Industrials Model has accomplished what it is best at: calling a bottom, and sustaining the trend. As a friend, we will simply call him the Dow Model from now on, courtesy of The Other Street (r).

As of the close on Thursday June 30^th, Dow 12414, the Expected Trading Range has gone up by another 150 points or so, to 12250-12574, with an expected target of 12460. However, Momentum is weakening, with MAC at 1.57 – it was at 1.77 on June 27^th – and AA at 1.87 – it was at 2.30. Remember, “1” is the bottoming phase, “2” is the uptrend.

This should not be surprising. As I look at individual stocks, aside from the algorithms, I scribbled “way too fast” four times: UTX ($86.47), MMM ($93.11), MCD ($84.57), and KO ($66.71) – interesting, two Industrials, two Consumer Non-Durables. In these 4 cases, while the primary trend is a “2”, the secondary is either a “3”, a top, or in the case of MMM, a sudden deterioration to a “4”, a downtrend. The Drug stocks, by and large, remain weak, but PG ($62.55) has stabilized.

It was nevertheless an impressive day, coming on the heels of an impressive week. “Nine” stocks broke the resistance levels set on Wednesday – CAT, UTX, MMM, INTC, VZ, CVX, HPQ, PG, and XOM. Another “Six” were testing it – DD, MSFT, KO, DIS, BA, and CSCO. The mean daily absolute performance was 1.16%, with a standard deviation of 1.04%, big as usual. Yet the Dow closed fairly near its Expected level of 12429 – go figure.

In the meantime, stocks are moving up in their trading range. The OB/OS ratio is now at 0.51 - it was at 0.45 on Monday.

Two other caution data points. One, while the S&P 500 has broken moving averages resistance at 1317, the next Fibonacci stop is at 1327, less than 1% away. Two, China just released its latest PMI - it has weakened further to 50.9, the lowest level since February 2009. So while Japan is rebuilding, China is stalling.

What should we do now? First, watch the “Nine”. They need to confirm their break. Then watch the “Six”. The Momentum is not clear, and they could do what AA did – test resistance and fall back. If anything, what happens on June 30^th stays on June 30^th – if my calendar is correct, tomorrow is July 1^st, and Monday we will be closed.

I took some profits today. I entered the week 60% long, 20% short, 20% cash. I am now 40% long, 40% short and 20% cash. I do not think I will put more risk on the table tomorrow – time to prepare the BBQ. You do not want to look at Q2E with an empty stomach.

Note: This was written June 30th after the close. As I saw confirmation of the move early today, Friday July 1st, I did put on more risk on the table when S&P broke 1328. I will reduce the exposure through the close, but no less than 50% long, 30% short, 20% cash.

Disclaimer: Capital Max may at times be long or short the stocks mentioned above. The content of this study by The Other Street is mainly based on technical analysis, which is highly subjective and not based on fundamental factors. In either case, price outcomes may greatly differ from expectations. Do not base your investment strategy on the above prior to conducting your own analysis, or consulting with your own financial advisor. We do not know your investment profile and this is not to be considered as personalized advice. This does mean that we do not try to do our best – we do. We simply want you to be aware of the risks involved which, obviously, include the fact that past performance is not something you should solely rely upon. Tomorrow will be another day.

Article courtesy of Capital Max (r) and The Other Street (r)

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DD, HPQ, GE, MSFT, SDS over the next 72 hours.