Dow Breakout or Market Fake Out?
Here's the Dow Jones Industrial average, which one would have thought would have confirmed the breakouts in the NASDAQ composite (View image) and S&P 500 (View image), the former having also been bolstered by a golden cross (50 day moving average breaking through the 200 day moving average).
Notice that volume in the Dow has been plunging (I penciled in a trend line poorly at the bottom there) even as the index has fought to overcome it's 200 day moving average which has been in a downtrend for at least a year. Ordinarily one would like to see volume picking up and a pop in volume as the index "busts out". We are definitely not seeing that with the Dow today. Notice the indicator at the bottom of the chart, it is a Moving Average Convergence Divergence indicator and it is pinned in "overbought" territory. Generally this would be looked at as a negative factor, meaning a stock or index has run too far too fast. In the case of the current market however, as much as this holds true, it is also a longer-term positive, that after being virtually unable to even become overbought for the last year, that the index could get and stay so overbought. So when I wrote about a potential breakout in the Dow last week heralding a new "bull market", I looked at this negative indicator as a more minor factor.
The fact that the Dow was poised to go "topside" and confirm the breakouts in the other indexes, but has barely been able to claw out a close above the 200 day moving average, is a warning that this rally, which has already been one of the most powerful in history, is quite long in the tooth. If it fails to regain its legs soon, it could be a long and painful summer. It could also be technically described as a bear market rally, perhaps the mother of all bear market rallies.
Comments (7)
The market continuing to go up is completely irrational: unfortunately, the market can stay irrational for a very long time.
You think unemployment is bad now? Wait until public sector layoffs begin in force.
Posted by Thisson | June 10, 2009 12:16 PM
Looking at the daily charts of the indices(i use the market etf's-DIA, SSO, QQQQ) I see a base forming from which the most likely scenario is a breakout. The weeklies show a failed breakdown and the monthlies a strong counter trend rally. All bullish. All my longs have a stop loss below the daily base forming. TBT a monster today. Rising interest rates are eventually going to be an issue but it is currently being viewed bullishly for equities.
Posted by cfranch | June 10, 2009 1:08 PM
I think we go sideways w/a bullish bias until the next window dressing period. That would be the end of this month. Then you will see the real fireworks in July.
Posted by In Debt We Trust | June 10, 2009 2:03 PM
Sideways, commodities and companies that export out of the US will grow the E in the P/E ratio while consumer and real estate go down. I'll also win the lotto next week. I hope my predictions are right.
Posted by MeekSheep | June 10, 2009 4:28 PM
Geez. Did you guys see the bond market today?
There goes purchases and refis.
Recovery huh. Tell that the the homeowners getting priced out of the market w/ 30 yr. rates pushing 6%, 6.5%, 7%. It just shortcircuited the housing market.
Posted by In Debt We Trust | June 10, 2009 4:39 PM
Actually, yes, was very active in the bond market yesterday. Picked up some nice Texas A rated muni's yielding 6-7%.
Posted by MeekSheep | June 11, 2009 7:40 AM
So what's going to happen with the yield on the 10 year over 4%? Will BB run the printers and conduct more QE? Or will he give up?
If there's no more QE on the 10-year, housing is dead, and bank earnings are going to get CRUSHED. They *need* those earnings badly to fill the holes that they'll take as they are forced to acknowledge write-downs.
And on top of this, California posted a 50-day insolvency warning... and yet the market closed up!!
Posted by Thisson | June 11, 2009 5:59 PM