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Technical Market Indicators
Dow Theory, W.D. Gann, MetaStock, system tester, indicator builder, custom formulas, momentum, overbought, oversold, buy, sell, signals, top, bottom, Bull, Bear, consolidation, sentiment, contrary opinion
August 15, 2016
U.S. Stock Market: what do the majority of investors appear to be willing to assume?
Preview from my weekly report*
Wilshire 5000 Index has been in a rising trend since February, 2016. RSI price momentum and On Balance Volume continue to lag and diverge bearishly, however.
The broad-based Wilshire 5000 stock price index shows that despite a slightly higher price high last week, price momentum, as quantified by RSI, declined slightly. RSI still indicates bearish momentum divergence. RSI is a few points lower than it was last March and April, even though price is higher. Negative divergence often serves as an early warning of a downside correction ahead.
On Balance Volume also declined slightly last week, and it continues to warn of bearish divergence compared to the price index. As the Wilshire 5000 stock price index rose from February to August, 2016, OBV lagged far behind, recovering a fraction of its previous large loss. Trading volume is important because it takes rising volume to push prices up, while prices can fall of their own weight on light volume. OBV measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. Traders and investors watch for divergences between OBV and price to predict possible price movements. We also use OBV to confirm price trends.
The Dow Theory still has not confirmed a Primary Tide Bull Market. The Dow Jones Industrial Average rose to a higher high last Thursday, but the Dow-Jones Transportation Average fell last week and continues to lag far below its highs.
Global central banks continue to print money at an unprecedented pace. The global economy remains disappointingly weak, and so the global monetary authorities continue to print newly-created fiat currency in so-far futile attempts to boost economic growth. Some of this massive money printing has been finding its way into global stock markets, accounting for the price uptrends over the past 7 years. The majority of investors appear to be willing to assume that the stock market will continue to rise until the money printing eventually stops. The world remains a risky place, however, and so we should be prepared for a return of the volatile, high-risk, stock market roller-coaster that has been evident for most of the past year. The stock market is notorious for swinging from one extreme to the opposite extreme. Therefore, there is no change to our recommendation that traders and investors should carefully manage their risk exposure and be prepared for greater volatility ahead. Risk exposures ought to be well controlled.
Contrary thinking still suggests extreme caution, based a dramatic turn to extreme greed for investor sentiment. $VIX Volatility Index and the Equity Put/Call ratio both collapsed to levels indicating extreme bullish excess. The CNN Money Fear & Greed Index remains in the danger zone, after jumping from 42 (moderate fear) on 7/1/16 to 91 on 7/20/16--the highest reading in 2 years and a level that indicates extreme greed. The current reading is 75, which still indicates extreme greed. As Warren Buffett advised, "Be fearful when others are greedy and greedy when others are fearful." (For details, see http://money.cnn.com/data/fear-and-greed/).
$VIX Volatility Index fell to its lowest level in nearly a year this month, indicating extreme bullish enthusiasm. Although a low reading on $VIX by itself does not necessarily promise an immediate stock price reversal to the downside, it does strongly suggest a cautious approach toward the recent price bounce and a significant probability of a trend reversal.
The Equity Put/Call Ratio indicates extreme bullish enthusiasm. Low levels below 0.55 have coincided with past trading tops for the stock market, while high levels above 0.90 have coincided with past trading bottoms. Trading in the opposite direction to this crowd of short-term options speculators often has proved to be a smart strategy.
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