Daily Market Reports | Feb 20 2009
By Greg Peel
The Dow closed down 89 points, or 1.2%, to 7465. The S&P fell 1.2% and the Nasdaq 1.7%.
On Wednesday, the Dow closed at 7555. The previous closing low, set on November 20, was 7552. Any trader could tell you that to breach the previous low is to shatter confidence in market’s direction. We thought we had a bottom in place. It might take time, but we thought we could only now creep our way out of this. But if it’s not the bottom, then where is it? We’re back to trying to catch that falling knife again.
Technical analysts take such levels very seriously. For the last few weeks, technical analysts have been telling us that 7552 is a vital number because a close below that level will indicate a return to the (bear) trend, according to Dow Theory.
Dow Theory, developed early this century by the founder of the Wall Street Journal and the Dow Jones media company, is considered to be the basis of all modern technical analysis. It suggests that markets move through three phases: (1) the smart money moves in quietly, ultimately causing a market to turn; (2) the rest of the world sees the turn, and stampedes in; (3) the smart money gets out. This works whether the market is going up or down.
Brilliant! Who would ever have thought of that! Give Mr Dow a Nobel Prize!
Within these moves the market will also suffer corrections, Dow Theory suggests, which could be “short” or “medium” on a time basis, within a longer term trend, and which involve a reversal of between 33% and 66%. Take a snap-shot of 100 years of trading, with the capacity to zoom in and out, and I’m sure this remarkable phenomenon will be evident everywhere. The only problem with Dow Theory is that it is a bit vague, and open to interpretation. Hence two Dow Theorists may independently give you a bullish view and a bearish view from the same data. Indeed, most forms of technical analyses rely on significant levels at which a market could go either way.
Thanks, that’s really helpful.
Technical analysis is always extraordinarily accurate in hindsight. It is also very good at picking those important 50% chance levels, mostly because everybody is watching the same level at the same time. Technical analysis is self-fulfilling. Veteran traders on the NYSE have noted this week that there have been two sides battling it out in thin trade – those looking for a reason to buy, and those trying to “make” the Dow close below 7552 so as to trigger a technical return to the bear trend. The idea is to get short and then put the fear of God into everyone. What do you think might happen?
“As long as people believe in absurdities they will continue to commit atrocities” – Voltaire.
The good news is that most intelligent traders dismiss the Dow Jones Industrial Average as an indicator of little value. The arithmetic average of 30 stock prices does not a market make. The market-weighted S&P 500, on the other hand, is a true index. Last night the S&P closed at 778. The November low is 741 – another 4.7% lower. That’s where we have to go to retrigger the bear trend, say S&P followers.
But back in the real world, the market was supposedly weak last night because Hewlett Packard (a Dow stock) reduced its guidance. Beyond that, it is still a lack of detail on the TARP which is weighing on this market. That is not to say that the right “detail” is going to provide a silver bullet.
The big news of the night, however, is that oil jumped 14% – up US$4.86 to US$39.48/bbl. The trigger for the jump was the latest weekly inventory data. Analysts were expecting another increase of 2-4 millions barrels of crude in the US but the figure came in as a reduction of 200,000 barrels. Moreover, gasoline consumption over the past four weeks has defied expectations and jumped 2.6% from last month. Have we seen the bottom?
Possibly, but not just because oil jumped 14% last night. As I have been pointing out for a week now, the March delivery contract expires tonight and then we roll into April. There was a very big long position in March which has been gradually rolled out to distant months, thus pushing the March price well below April – by as much as US$8 last week. Something had to give, and the likelihood was that April was a more indicative price. Trading becomes extremely volatile around expiry as traders try to push the price one way or the other to avoid a loss. Last night the market was clearly caught short. And traders don’t necessarily wait until the absolute death of expiry day to bail out of the front month. April closed at US$40.18/bbl.
Those weekly inventory numbers, just like the weekly jobless claims, are a bit of a roll of the dice anyway. They jump all over the shop. The gasoline consumption reading is more pleasing, but could just as well be some other statistical aberration too.
I noted in “Could The Eastern Bloc Bring Down Europe?” last week that there are not enough IMF reserves left to bail out the failing former Soviet countries. Since then, Japan has offered to top up IMF reserves as another means of keeping a lid on the yen. Now Germany has also offered to provide funds to the IMF as the Eastern bloc threat intensifies. As the risk of catastrophe thus eases somewhat (at least from knowing that “something” is being done), the dumping of euro has stopped. Last night the euro clawed back some ground, sending the US dollar index lower.
The result was that gold took a well-earned breather, falling back US$7.60 to US$981.40oz. The Aussie jumped half a cent to US$0.6444. Oil would also have been boosted by this sudden reversal in the greenback.
There was also some reaction in base metals, with copper and nickel jumping 2%.
The SPI Overnight fell 13 points.
Altogether now, with gusto: When the moon…is in the seventh house…and Jupiter…aligns with Mars…
