Before the Federal Reserve announces their decision, let’s take a very quick look at the current technical picture of the Dow Jones Industrial Average:

• Price is just under 400 points away from all-time highs.
• Price made a new momentum high (annotated NMH in the bottom oscillator)
• There is a convergence of support from all three key moving averages and a horizontal trendline which should thwart selling pressure (unless the Fed actually raises rates)
• Price is above all key moving averages
• Price carved out a new swing high
• Price is still in a confirmed downtrend on the daily chart, though very close to switching back to an uptrend
• We see Non-Confirmation by Volume, as higher prices have been met with lower volume. This is temporarily bearish.
• Price is at the top of the daily Bollinger Band (bearish to neutral)

Of course, all this could change when the Federal Reserve announces their rate policy later.

A cut of .50 should cause price to rocket through the Bollinger and potentially make new all-time highs by the end of the week.

A rate increase will likely take price beneath key support, though this is highly unlikely and would surprise about 90% of traders/investors.

It looks like the market has already discounted the expectation of a .25 basis point cut by the Fed.

The staff at Minyanville posted a thought provoking article entitled “Never Bet Against the House,” in which the author discusses some of the consequences and unintended effects of the increasing willingness by the government to “bail out” risk-seeking investors.

In the opinion piece, Malcolm states:

“Not only have risky investments been deliberately supported by government policy, but less risky paths have been infected by overspill from the risk-taking activities; worse yet, my very own government is treating me as a sucker. I mean openly, which is kind of new.”

“The increasing role of federal intervention in stimulating certain segments of the economy and bailing out risk-takers has made it increasingly clear that the choice to be a conservative investor was not only foolish, but is being deliberately singled out for punishment by our own government.”

Furthermore,

“The net effect of these bailout activities is to reward the people who took wild risk and ignored generations of wisdom about debt and gambling.”

Read the entire piece for complete insights.  It really makes you wonder, especially to the traders who continuously refer to the “Plunge Protection Team” which always seems to sweep in and save the market at its absolute worst moment.

What will be the consequences in such policy when many investors ‘catch on’ that their risks will be rewarded in the end?

And what will happen when a new administration or a new policy is adopted that is more akin to the ‘old way’ of thinking?

It’s worth a few minutes of your time to ponder such possibilities.

Looking at the Sector Rotation model over the past 10 and 30 days, we see bearish longer term and mild-to bullish short-term sentiment as a ‘money flow’ indicator.

Let’s first look at the 30 day segment of sector performance:

We see fund flows into relatively defensive or bearish sectors during the period from late October to present.

Consumer Staples, Health Care, and Utilities have far outpaced the other sectors, especially the bullish ones such as Technology and Consumer Discretionary Spending.

Financials, which has at times led the market, was the worst performing sector.

This picture is in line with the 60 day period as well, signifying defensiveness and ‘uncertain times ahead’ according to the model.

However, the shorter term picture is a bit more bullish. While we don’t see the opposite picture, we do see signs of hope:

In this period from late November to present, we do see the financials outperforming every other sector with the exception of Basic Materials.

If Financial stocks do lead the market, then we should be seeing higher market prices in the short term.

Indeed, we are seeing “money flows” out of the defensive sectors and into more expansionary or ‘bullish’ sectors according to the model.

Short term movement precedes long term movement, and if the current trend continues, we could see higher prices for the broader indexes according to the simple interpretation of this model.

Let’s take a look at the current “Swing Charts” of the major US Stock Market Indexes:

First, the Dow Jones Daily:

• Price is nearing the Upper Keltner Channel
• The recent upswing is greater than prior upswings, but failed to create a new momentum high
• Price is above all key moving averages
• Price is in a more bullish formation than otherwise could be
• Price made a new swing high relative to the prior upswing

Dow Jones Weekly Chart:

• Price is still “in the middle” of a clear broadening formation
• Momentum is in a clear downtrend channel
• The momentum oscillator carved out a new momentum low of the past two years
• Price formed two negative divergences
• Price swings are clearly overlapping, indicating supreme indecision in the broad marketplace

US Dollar Index (Weekly):

The US Dollar Index has been in a clear downtrend since 2006 (and before).

Price made new (relative) momentum lows along with price

The recent price swing lower was far larger than the prior swings lower, and could indicate capitulation or continuation.

US Dollar Index (Daily):

• The most recent downswing in price created a positive momentum divergence which has clearly resolved strongly to the upside
• Momentum made a new relative high, but price is far from making new highs.
• Price formed a new swing high, taking out the prior swing high which is the first step towards a new uptrend
• Price appears to be facing resistance at the key declining 50 period moving average

NASDAQ Weekly:

Despite all the volatility in the market, the NASDAQ composite index remains the picture of bullish strength.

The most recent downswing (correction) created a higher low, supporting at the key 50 period moving average.

The Momentum Oscillator registered a new momentum high, signaling that odds favor new price highs are yet to come.

There is no glaring sign of weakness in this chart, but rather strength on the side of the buyers.

Typically, when the NASDAQ leads the market, higher broader index prices are yet to come.

Always keep in mind the possibility of the “Christmas Rally” ahead at the end of December.

 

 

Congratulations to Dr. Steenbarger at the TraderFeed blogspot for its two year anniversary!

Dr. Steenbarger’s site was one of the first blogs I discovered and have read almost every day, and I have gained so much insight from reading his posts, and I wanted to extend an extra word of thanks for his support of this site and for the amazing posts he provides each and every day.

He provides insights and challenges not found in the larger trading community, and his mantra “comfort the afflicted and afflict the comforted” is extremely unique in this field.

It’s been said before, but I still don’t know how he does it! As a blogger, it is difficult work to communicate effectively and intelligently each and every day, yet Brett does so extraordinarily well.

I wanted to call special attention as well to his recent post entitled “When Trading Performance Falls off a Cliff.”

In it, he discusses reasons why traders who have been doing well suddenly experience unexpected or sustained drawdowns, or periods of significantly lower performance.

Not only does he discuss reasons why this experience may happen (it might not be 100% performance related), but he provides six suggestions from his work with traders that can help you overcome such periods of negative performance.

Go give Brett a note of congratulations and check out this post if you have been experiencing a period of sub-par performance, especially in this environment of heightened market volatility.