FALLING 50-DAY AVERAGE USUALLY PROVIDES MORE RESISTANCE ON MARKET BOUNCES -- TIME TO SHORT THE YEN? -- ANALYSIS VERSUS REPORTING

DOES FALLING 50-DAY LINE MEAN ANYTHING? ... One of our readers correctly points out that the blue 50-day moving average is declining for the first time since last March, and asks if that makes it more of a resistance barrier. The short answer is probably. Although most attention is paid to "crossings" above and below a moving average, the "direction" of the line itself is also important. Near the end of October, the SPX fell below its rising 50-day line briefly before moving back above it within a week (see circle). Last July, the SPX also fell below its 50-day line for eight days before turning back up again (see box in Chart 2). At that time, the 50-day line continued rising as well. Since mid-January of this year, however, the 50-day line has been dropping. That makes the recent price decline a bit more serious. For recent damage to be reversed, therefore, at least two things have to happen. First, the SPX needs to close back above the blue line. Secondly, the blue has to start rising again.

Chart 1

Chart 2

TIME TO SHORT THE YEN?... One of our readers asked if it was time to short the yen. Chart 3 shows the CurrencyShares Japanese Yen Trust (FXY) falling below a "falling" 50-day moving average after failing to reach its fourth quarter high. That puts in place a series of "declining peaks". A close below its 200-day average and January low would turn its trend down. This ETF measures the yen against the U.S. Dollar. I'd have to say at this point that the short side for the yen looks promising. A close back above its February peak near 112, however, would negate that negative view.

Chart 3

ANALYSIS VERSUS REPORTING ... One of our readers complained that my Tuesday message on the continuing bounce in stocks and commodities read like a newspaper report and had little value. He asked where the "predictive" value was in technical analysis. I'd suggest the reader read my message from the previous Tuesday which carried the headline: "Big drop in Greek bond yields encourages stock rebound as dollar drops -- Materials are stock leaders ... A lot of 200-day averages are holding for now -- That suggests a short-term bottom -- Expect resistance near 50-day average if rally carries that far." This Tuesday's message was simply an update of the previous Tuesday when the "prediction" for a stock and commodity rally was made. The ability to anticipate the rebound in stocks and commodities (and basic material stocks) is where the value of technical analysis comes into play.