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Monday, November 5, 2012 - Short Term Update

|Includes: DIA, FXE, IEF, QQQ, SPDR S&P 500 Trust ETF (SPY), TLT, UUP

Bottom Line:

Thus far markets have failed to rally despite the plethora of oversold indicators. That said most of the indicators still favor a rise vs. a decline.

Indicator Summary:

  • Bullish: 50%
  • Neutral: 50%
  • Bearish: 0%
  • Aggregate Interpretation: Many of the most sensitive short term indicators that I watch have had some recovery from their oversold conditions. It's never good sign when indicators recover and price cannot follow. That said, looking at the overall picture, I believe the odds still favor higher prices rather than further declines.

Indicator Snap Shot:

Percentage of Stocks Above their 20 DMA:

Notes: Despite the big setback on Friday, this indicator still favors higher prices rather than a further decline.

NYSE McClellan Oscillator:

Notes: The McClellan still appears to be basing. The McClellan oscillator in combination with the percentage of stocks above their 20 day moving average tends to be a pretty powerful trading indicator when they're both alined, as is the case now, and one of the reasons I'm leaning towards higher stock prices, at least in the short term.

NYSE New Highs - New Lows:

Notes: New highs minus new lows also appears to be recovering from an oversold condition.

NYSE Advance - Decline Line:

Notes: In the middle of the range.

NYSE Up - Down Volume:

Notes: Also in the middle of the range.

NYSE TICK:

Notes: Neutral.

NYSE TRIN:

Notes: The Trin got very oversold, despite only a mild pull decline, now it's holding near neutral.

Price Action:

Dow Industrial:

Notes: The Dow has moved out of its upward trend channel, though not with any substantial bearish momentum. Prices are thus far being supported by a previous horizontal and Fibonacci support. RSI is rising, possibly showing a small bullish divergence between the first and second test of this support area.

Dow Transport Index:

Notes: The picture in the transport index is kind of mixed. Prices are testing resistance and short term RSI recently touched an overbought level. On the other hand, the transport index did not fall nearly as much as the main industrial index, and one could arguably draw small rising trend line connecting these two rising pivot lows.

Other Notable Notables:

  • The election ends tomorrow, and the reaction on Wednesday tends to be fairly predictive of the next several days. If the market's rally Wednesday, that should provide a bullish bias for the next several days. Likewise, a decline on Wednesday would add a negative bias over the next several days.
  • Watch the Euro here, as it has had a strong positive correlation with risk appetite here in the U.S. markets. Today the FXE officially dropped to the, "will do anything it takes" remarks gap. If it continues lower, that will be a negative sign going forward.

Summary:

Previously I attempted a small long position that was stopped out with a small gain in only two days. I'm taking another shot on the long side, though the position is smaller due to the fact that the setup doesn't look as strong as it did last week. Longer term, it will be a negative sign if the market fails to rally off oversold conditions. This will be a change in the character of the market, as the market has rallied strongly off even the most mildly over sold conditions in the last several months. As Connie Brown likes to say, "if the indicator rallies, and the market doesn't, you're on the wrong side."

So, in the short term am still leaning towards a short term rally, especially if markets react positively to the election outcome on Wednesday.

-Bill L.

Disclosure: I am long SPXL.