technicals

A Breakout Or A Fake-out?

Posted on by George Mahfouz

The major averages seemingly are on the verge of a breakout, or could it be a fake-out? The Dow Jones Industrial Average (see chart here) has recaptured the 25000 level. The S&P 500 (see chart here) has recaptured the 3000 level. The Nasdaq Composite (see chart here) believe it or not is in striking distance of its all-time high and the small-cap Russell 2000 (see chart below) is also setting up for a breakout on its own. It is beyond impressive how the markets have come roaring back since late February. There are certain pundits out there that believe that this is a classic bear market rally however to me it feels like more than that. I have to believe that one of the main reasons why stocks have come roaring back in such a short period of time is the $ trillions of dollars in liquidity that the Federal Reserve and our government has injected into the markets and the economy. In fact, the Federal Reserve has quietly indicated that it is possible that they themselves would buy stocks if needed. Talk about establishing a floor in the stock market!

Another key development in the markets is how strong the technicals look right now. Without a doubt the leadership group of this recent rally is the Nasdaq Composite (see chart here). Tech stocks have benefited the most due to the lockdown. There are more people online than ever before, hence more sales accordingly. Since mid-April, not only has the Nasdaq cleared its 200-day moving average, it also has cleared its 50, 100 and 20-day moving averages. So now the Nasdaq is trading above all of its key moving averages which is bullish. Furthermore, the Dow Jones Industrial Average (see chart here) the S&P 500 (see chart here) and the small-cap Russell 2000 have also broken above some key technical resistance levels. Another technical indicator I look at the relative strength index also known as the RSI. At this point in time the aforementioned indexes are not in overbought territory. The RSI is a momentum indicator and when the value level of the RSI goes above 70 stocks or indexes begin to become overbought. This is currently not the case.

Good luck to all 🙂

~George

A Breakout Or A Fake-out - Paula Mahfouz

 

Despite A Month End Rally, Stocks Took It On The Chin!

Posted on by George Mahfouz

January proved to be one of the toughest months for stocks in years. The Dow Jones Industrial Average (chart) closed the month down 5.5%, the Nasdaq (chart) closed down 8%, the S&P 500 (chart) fell 5.1% and the small-cap Russell 2000 (chart) finished the month out down almost 9%. If it wasn’t for the strong month end rally, both the Nasdaq (chart) and the small-cap Russell 2000 (chart) would of closed out in correction territory. Clearly China and Oil continue to grab the headlines and continue to make investors very nervous. However, on Friday the Bank of Japan in a surprise move implemented negative interest rates for the first time ever in an attempt to aggressively stimulate their struggling economy. So once again a central bank acts and the markets respond. Even our own Federal Reserve stated last Wednesday that they are on high alert pertaining to the global markets and the affects that are being felt here at home. In other words, there may be a pause in raising interest rates here in the U.S.?

That said, what never ceases to amaze me is how technically disciplined the markets can be. If you look at the major averages over the past two weeks you will see that all of these key indices held their August 2015 lows. Especially the Dow (chart) and the Nasdaq (chart) which traded down almost to the nickel to their respective August lows. In my previous blog I cited the Federal Reserve and their policy shift to raising interest rates and the fact that now markets and equities can be assessed on their own merits versus what the central banks may or may not do. Well Friday’s Bank of Japan’s move is a reminder that central banks around the world are ready and capable of intervening at any point in time. Which brings me back to this, how in the world can you confidently have a short thesis in these markets? In my opinion, this model is simply too risky when you have monetary policies that can turn on a dime.

So what’s an investor or trader to do? One thing that stands out to me is throughout all of the noise and chatter is that the technicals continue to perform with the utmost efficiency. Whether markets or equities are overbought or oversold vis-Ă -vis the relative strength index (RSI) , or support lines are met and hold. No one can deny how disciplined and efficient technical analysis can be.

Good luck to all 🙂

~George

Yet Again, The Fed Saves The Day…

Posted on by George Mahfouz

U.S. stocks and global markets fell sharply at the beginning of the week as the Russian ruble collapsed. This meltdown spread fears of contagion throughout the world while sending our markets down over 5% within a one week span. Then like clockwork, in a statement after the conclusion of the latest Federal Reserve meeting, the central bank reiterated that it is in no hurry to raise interest rates. This was enough to send the Dow Jones Industrial Average (chart) soaring 4.15% over the past two trading sessions, the Nasdaq (chart) gained an eye-popping 4.41%, the S&P 500 (chart) jumped 4.48% and the small-cap Russell 2000 (chart) over the past two trading sessions posted a staggering 4.63% gain. Yes folks, these two-day gains are not a typo.

Seemingly, time and time again, whenever there is a U.S. stock market correction in the making, the Fed steps in and calms the nerves of investors. The question I have is when will the musical chairs stop? What a tough climate to invest in especially when you really can’t gauge the fundamentals as the markets are heavily reliant on what the Federal Reserve does or does not do. When the markets were selling off, technicals broke down, moving averages were violated and the bears were beginning to growl. However, as we have witnessed over the past 5 years or so, it has been painful to be bearish on equities and any sell-off has been short lived. It may indeed take rising interest rates to slow down this bull market? Until then, it’s great to be a bull. That said, I am going to sidelines between now and year-end for a much needed break, and to see how things settle out.

Both Paula and I wish everyone a very safe and happy holiday season 🙂

~George

Super week for stocks!

Posted on by George Mahfouz

Stocks rallied for the second straight week as the key indices have now just about recaptured all of their losses incurred in August. The Dow Jones Industrial Average (chart) had one of its best weekly showings of the year gaining over 3%, the Nasdaq (chart) closed the week up 1.7%, the S&P 500 (chart) +1.98% and the small-cap Russell 2000 (chart) finished the week up 2.37%. Over the past couple of years, time and time again whenever equities as a whole have had a five percent pullback or so, such as what we experienced in August, a significant rally ensues and the bull market seemingly resumes. They say markets are forward looking indicators, well we must be in store for quite the year-end closeout, or are we?

This upcoming week the FOMC meeting will take center stage. The debate is on as to whether or not the Fed will start reducing its bond and mortgage back securities purchases and what effect this could have on the markets. My feelings are that there is still enough tepid economic data coming in for the Fed not to begin to taper. However, there are plenty of pundits out there that argue that the economy is beginning to show pockets of strength which could give the Fed the green light to begin with a small reduction with their future purchases. Either way, the technicals are now on their way to overbought territory, and interest rates are continuing to rise with the 10-year treasury note (chart) closing in on 3%. This could be a one-two punch to once again slow down and even potentially reverse this most recent rally.

That said, if you are a technical trader, this is an almost perfect environment to trade in. Support levels are continuing to be honored as well as resistance marks. We now find ourselves butting up against the upper end of the trading range in the S&P 500 (chart) and we could very well be headed back to support levels which in this case would be the 1630 zone on the S&P (chart). If the markets embrace the Fed’s action or lack thereof, a breakout above the all time high of 1709 of this key index could very well be in the cards.

Good luck to all and have a great week 🙂

~George

 

Stimulus to continue…

Posted on by George Mahfouz

Stocks finished the week modestly lower despite the Federal Reserve extending its commitment to keep interest rates near zero. For the week, the Dow Jones Industrial Average (chart) closed lower by 20.12 points, the Nasdaq (chart) -6.71 points, the S&P 500 (chart) -4.49 points and the small-cap Russell 2000 (chart) was one of the sole indexes that managed to eke out a gain finishing the week up 1.48 points.

On Wednesday the central bank enhanced its accommodative policies by now tying the near zero interest rate environment to the unemployment rate vowing that interest rates will not increase until the unemployment rate in our country moves down to 6.5%. I think this creative move surprised most economists for never before has interest rates been directly tied to the unemployment rate. However, the market reaction was less than impressive to latest addition that the Fed made to its policy. My beleif is that until we get some sort of deal out of Washington on the fiscal cliff, not too much will be able to move the needle on these markets. That said, once we have clarity on the fiscal cliff dilemma, I will continue respect the power of the central bank and its ability to remain a significant force in our economy and our markets. In the meantime I will pay close attention to how the market action looks vis-a’vis the technicals on the key indices, and will be ready to deploy a long bias strategy once the coast is clear, Good luck to all.

Have a great weekend 🙂

~George

Post election drubbing!

Posted on by George Mahfouz

Stocks were slammed this week after the results of the 2012 presidential and congressional elections. In fact, it was the worst performing week for equities in months. The Dow Jones Industrial Average (chart) lost 2.1%. The Nasdaq (chart) -2.6%, the S&P 500 (chart) -2.4% and the small-cap Russell 2000 (chart) finished the week lower by 2.4%. With the election producing essentially no change in Washington, fears of the fiscal cliff playing out and much higher taxes took center stage and sent the markets spiriling. Furthermore, all of these bellwether indexes are now trading below their respective 200-day moving averages. For most market technicians and certain institutional investors, the 200-day moving average is a key technical metric that is relied upon as to the future direction of stocks or indexes. Personally, I would need to see several days of trading and closing below the line in order for me to completely change my view of where stocks may be headed.

Now that the election is behind us, we can all now begin to focus on not only what Washington will or will not do, but what really is happening behind the scenes of the economy and corporate America. Q3 earnings reporting season is winding down and as expected corporate profits have been affected by the slowing global economy. Between now and year end, I will be paying much closer attention to the economic numbers here and abroad, and even closer attention to the underlying technicals of the markets, which are beginning to show some cracks. As previously stated, in my view a couple of days of the indexes trading below the 200-day does not concern me too much, however, if we see a repeat performance next week with stocks continuing to decline, we very well may be in for a meaningful reversal that the bears have been waiting on. Good luck to all.

Have a great weekend 🙂

~George

Let’s talk technicals…

Posted on by George Mahfouz

As certain stocks and markets continue to unexpectedly plow to new 52 week highs, I think it’s time to look at the technical aspect of the indexes. For the week, the Dow Jones Industrial Average (chart) finished up 0.51%, the Nasdaq (chart) +1.84%, the S&P 500 (chart) +0.87% and the Russell 2000 (chart) +2.29%. I do not remember a time when equities have behaved this well in the month of August, albeit on very low volume.

Now to the technicals. I typically refer to two of the more popular technical indicators that certain market technicians, program trading models and even institutional investors utilize, and they are, the Relative Strength Index (RSI) and the Moving Averages technical indicators. The RSI is designed to demonstrate whether or not an index or equity is overbought or oversold, depending on certain value levels. According to the RSI principle, the 70 value level or greater, is an overbought condition and the 30 value and below is an oversold condition. Pertaining to the moving averages, the 50-day and the more closely monitored 200-day moving average, are the key markers that market technicians and program trading models look for and potentially act on.

In looking at the four major averages, they are all currently trading considerably above their respective 50-day and 200-day moving averages. However, both the Nasdaq (chart) and the S&P 500 (chart) is on the cusp of breaking through the 70 value level on the RSI. Furthermore, the Dow Jones Industrial Average (chart) and the Russell 2000 (chart) are not too far behind trading around the 65 value level. This is an indication that the markets are potentially becoming overbought and are due for some type of pullback. Please keep in mind that stocks can remain overbought or oversold for extended periods of time. That said, when the RSI on a given equity or index begins to trade at or above this key level, a reversal of some sort typically occurs. Now there are many other factors and technical indicators to refer to when analyzing market conditions, but my preference is to keep it simple when looking at the technicals, and the RSI and moving averages indicators do it for me. Good luck to all.

Have a great weekend 🙂

~George

 

Next week promises to be a doozy…

Posted on by George Mahfouz

Stocks closed the week with a bang, but that’s nothing compared to what’s in store next week. Between dozens of companies reporting their Q2 results, and Ben Bernanke speaking before Congress on Tuesday and Wednesday, I am looking for a spike in volatility that may last all week long. Yesterday, the Dow Jones Industrial Average (chart) closed up 203.82 points, the Nasdaq (chart) +42.28, the S&P 500 (chart) +22.02 and the Russell 2000 (chart) +11.37. With all that’s in store next week, I am also looking at the technicals to see if these key indices can breakout of their respective trading zones. What was impressive to me yesterday is that all four indices either held, or moved and closed above their 50-day moving averages.

With earnings reporting season kicking into high gear, I would expect that this will be the catalyst to whether the markets breakout or breakdown. On Monday all eyes will be on Citigroup (NYSE: C), followed by reports out of Goldman Sachs (NYSE: GS), Intel (NasdaqGS: INTC) and Yahoo (NasdaqGS: YHOO) on Tuesday. Wednesday we will hear from Bank of America (NYSE: BAC), U.S. Bancorp (NYSE: USB), American Express (NYSE: AXP) and eBay (NasdaqGS: EBAY), just to name a few. Closing out the week, Q2 earnings reports will be issued from Morgan Stanley (NYSE: MS), Phillip Morris (NYSE: PM), Google (NasdaqGS: GOOG), Microsoft (NasdaqGS: MSFT) and General Electric (NYSE: GE).

So as you can see, next week should indeed be a doozy! Good luck to all and happy trading 🙂

~George