With investors having nicely responded to my recent blog posting ("Today May Be The Day"), here are a few price points of interest and what to consider when either is breached first:
1100 is the average of the 200 day moving average (simple and exponential). 1040 is the acknowledged lower bound of the support that some have referred to in the media. Both are lines in the investor sentiment sand that are useful for one primary purpose - as contrary indicators. Here's why:
Without fail, whenever price crosses its 200 day moving average (up or down) a reporter contacts me to inquire as to the importance of the cross. My response is always the same - by itself, price crossing its 200 day moving average is meaningless beyond the fact that it means something to some investors and, therefore, should be used to exploit that faux value (as in act in the opposite direction).*
As for the lower support bound of 1040, this is the type of technical analysis analysis that gives technical analysis a bad rap. How some could construe the significance of 1040 from the accompanying chart** is a wizardry that is beyond my human capabilities. Then again maybe I should consult my ouija board more often than I do.
Next Up, Earnings
As we enter the ever treacherous third quarter of the year, the fundamental driver for a new bear should become evident. Macro economic reports issued beginning next month should provide insight into whether 3Q10 earnings (the single stool holding up the equity markets) will continue their recovery or provide the first signs of earnings disappointments to come.
In light of recent macro economic developments (G20 decision to implode the world economy being at the top of the list) and the risk of fragmented governments and their increasing inability to address the problems of the day individually and collectively in a coordinated fashion, the probabilities that the peak in earnings have been realized (certainly gross margins have) increase significantly. Should this occur, the increasingly bearish message of market (in the form of market breakdowns) then makes considerable sense.
Investment Strategy Implications
Head fakes are the staple of good short term trading opportunities. The breaking of arbitrary lines in the sand is an opportunity for contrarian action.
As noted several times over the past several weeks, the odds are that we are in distributional range with the outcome pointed toward a new bear market. However, as noted many times before, not all markets have signaled a Mega Trend reversal. It is therefore possible that the heretofore strong part of the global markets - the US - will lift the sinking boats of Europe and the drifting junks of Asia, thereby reversing their recent (realized and emerging) Mega Trend bearish signals. The latter is the lower probability.
*See Mega Trend examples in prior postings for the value in price crossing its 200 day moving average.
**Click image to enlarge. I could see 1050ish as a support price point, but 1040?
Vinny Catalano, CFA, Global Investment Strategist with Blue Marble Research publishes the "Sectors and Styles Strategy Report" newsletter, which contains the market beating Model Growth Portfolio. To learn about subscribing as well as other benefits, click here.
06-15-2010 10:55 AM
Vinny Catalano, CFA