MORE ON MOVING AVERAGES -- DAILY AND WEEKLY EMAS REMAIN NEGATIVE -- MONTHLY EMAS TURN NEGATIVE FOR FIRST TIME IN SEVEN YEARS -- STOCKS AND COMMODITIES HAVE ANOTHER BAD DAY
SMOOTHING OUT PRICE TRENDS ... Arthur Hill wrote yesterday how moving average trends smooth out the market's intra-day swings and help us keep our eye on the over-riding trend which is still down. One of the nice things about moving averages is that they remove emotion from the decision-making process and help spot market turns. As Arthur mentioned, I like to use the 13-34 exponential moving average (EMA) combination. That's true for daily, weekly, and monthly lines. Let's see how well they've done starting with the dailies. Chart 1 compares the 13- and 34-day EMAs over the last year for the S&P 500 (top of chart). The position of the two daily EMAs determines the market's short-term trend. After turning negative last November, the daily EMAs gave a short-term buy signal at the start of April. That short-term buy lasted until the start of June when it reversed to a short-term sell. It's still on that sell signal. If any type of yearend rally is going to materialize, those lines will have to turn positive.
Chart 1
WEEKLY EMAS HAVE BEEN BEARISH ALL YEAR ... The weekly EMA lines, which measure the longer range trend, turned negative at the end of December (down arrow in Chart 2). Chart 2 shows that they've been negative since then and still are. The late 2007 weekly sell signal, by the way, was the first sell signal since 2000. To see how well the 13- and 34- week EMA combination has worked over the last ten years, take a look at Chart 3. In those ten years, only three weekly crossovers (signals) have taken place: A major sell signal in late 2000, a major buy signal in spring 2003, and a major sell signal at the end of 2007. That's a pretty impressive track record and shows why I rely so heavily on that EMA combination.
Chart 2
Chart 3
MONTHLY EMAS TURN NEGATIVE ... One of our readers asked me to comment on the fact that the monthly 13-34 EMA combination has just turned negative. But first a little background on the monthly lines. In a February 5 article, I explained that monthly EMA crossovers are very slow in coming and sometimes take place as long as a year after peaking. That being the case, I suggested using the spread between the two lines as a better indicator of major market direction. That's the black line below Chart 4. I also suggested using turns in the 13-month EMA (blue line) to signal major turning points. The black and blue arrows show the early 2008 downturn which was first major downturn since late 2000. The 13-month EMA has now crossed below the 34-month EMA. The last time that happened was in the autumn of 2001 which was halfway through that bear market in terms of price and time. Chart 5 shows that there have been only four monthly EMA crossings in the last thirty years (see arrows).
Chart 4
Chart 5
STOCKS FALL AGAIN... Stocks had another bad day today. The hourly bars in the last three charts show the Dow and the S&P 500 bearing down on Monday's low. The Nasdaq Composite (Chart 8) touched a new low. Another plunge in the Euro (reflecting problems in Europe) pushed the dollar higher and commodities sharply lower. Oil lost nearly $5 and gold was down $40. Transportation stocks also plunged today (please see earlier Message). The only market up (besides the dollar) was Treasury bonds. No stock rally can materialize until the major market indexes clear initial peaks formed earlier in the week. Those peaks are 10881 for the Dow, 1168 for the S&P 500, and 2094 for the Nasdaq Composite. September lived up to its reputation as the worst month of the year for the market. October has a reputation for ending stronger after a scary start. Hopefully, that will be the case in this presidential election year. At least that's the historical tendency.
Chart 6
Chart 7
Chart 8
