David Kern's  Instablog

The nice thing about seeing the markets through the eyes of supply and demand is that you can gain early insight into the market’s direction.  This perspective reveals whether buyers or sellers are gaining the upper hand, inevitably determining the course of the market.  The weakest stocks are usually the first to turn down before the rest – like the canary in the mine, they can warn you to get out before the rest fall too.

I was asked yesterday to publish analysis of the AGG bond fund, as seen through the eyes of supply and demand.  In the case of the AGG, I don’t have a bullish percent or market breadth to reference in the same sense that I use for stock markets and sectors.  However, there are some simple tools that can easily be applied to identify price expectations for this fund.  Supply and demand always show up on the chart, so it’s just a matter of being able to identify where the buyers and sellers are at work.  In the case of the AGG, these are:

1. Interest rate trends
2. Good old price chart technical analysis

I typically use the AGG as a short term bear market parking spot for my TSP funds.  If I assess that the AGG is pulling back at that time, then I’ll bypass it for the ultra-safe “G” fund.  Today, I assess that the AGG is in a solid uptrend.  Though probably due for a point or so retracement soon, I expect it will probably outperform any alternatives over the next few weeks.

The following charts show my thoughts, starting with interest rates:

Next up (on the right), the big picture point and figure chart.

Finally, the short term.  This chart shows a clean price channel with a less pronounced overhead resistance line.  More obvious is the multiple levels of price support within a couple percent of the current level.