What was the nature of Bags rally from the lows of March? This is the question facing many investors correctly.
It 'obvious that you can imagine two scenarios opposite depending on whether the bullish movement innescatosi two months ago with the rescue of investment bank Bear Stearns be interpreted as a simple " bounce" in a trend Primary descending ( bear market) or as a decisive reversal of the cycle which begins a new bull market . How
teaches Martin Pring in his classic manual Analysis of Financial Markets , Handbags of the trends, it is possible to distinguish primary trends (bull markets and bear markets), intermediate trends (both in the sense in contrast to the primary trend, in which case are called " corrections" in an upward trend or "bounces" in a descendant), and short-term trends, not significant and lasting a few weeks at most.
What developed over the past two months is, obviously, a movement in between. But what kind? Again, this is the start of a new primary bull trend or a tricky bounce in contrast to the primary bearish trend (bear market rally )?
Characteristics of intermediate trend
I will return the description, clear and accurate, that Pring is the movement of the intermediate market. We can help. He writes on page 50 of the Volume:
"[...] There are basically two types of intermediate price movements: the first, following the direction of the main trend, trend can be called primary intermediate, the second is a phase of variable duration from four weeks to three months (and sometimes more) that usually retraces in reverse one-third to two thirds of the way covered by the trend in the intermediate phase immediately preceding and movement is called secondary or reaction. "
" Given that a phase intermediate primary follows the same direction as the primary trend of the market, most of the time it longer than that movements against the secondary, its size is generally higher also in terms of price changes . "
" As these phases of contrast notoriously difficult to predict for its character, magnitude and duration, from the point of view of trading should be avoided as a rule since almost always subject to ups and downs that can be confusing, they are inherently misleading and can be very dangerous . "
Extend Rally from the lows of March
Let's performance of equity markets . What Italian touched the highest in mid-May a year ago, but declined by 32% to the lowest in mid-March, then recovered about one third of that decline. What American fell by about 20% by mid-October to mid-March, then recovered half of its losses. What World (MSCI World Index, denominated in Euros) sold 28% before regaining about 40% of that downward movement over the past two months.
For duration and intensity, the intermediate trend is still going well within the range as defined by Pring characteristic of the secondary movement or reaction. " In short, it could well qualify as a bear market rally , "misleading" and "dangerous" as is the nature of these rapidly advancing trend.
On the other hand, it is conceivable that the movement of large purchases and extend, taking on their characteristics to the start of a new bull market.
But how realistic is this second line of interpretation?
application of an important technical
Always Pring in his book, operates a useful simplification When outlines the following "important technical principle "
"At any time there are four factors affecting the price: psychological, technical , Economic and Monetary ."
These are the things that came to me instinctively to review the past few days.
I did it to my account because I had the feeling that the intermediate trend started in mid-March could be about to run out and I did not find me unprepared for the next phase of the market.
To my readers I have made, animated by the same motivations, the two post U.S. economy, the risks of recession remain high and Among bear market and Bear Stearns, where does the stock market?
In those articles I've come to the conclusion that:
a) markets there is too much optimism (negative psychological factor);
b) 's U.S. economy is deteriorating and is in recession or close to recession, against the advice of the (negative economic factor, which could easily be expanded on a global scale, noting that in Europe and Asia the situation is deteriorating);
c) "the horse does not drink ", that is, in spite of the impressive action of relaxing the monetary policy implemented by the Federal Reserve, the credit - both enterprises and consumer - is contracting (monetary factor negative).
d) a bear market that had been concluded in March would be a strange animal, too gentle and kind than the typical bear market of the past (technical factor negative).
Technical analysis of the rally from the lows of March
This aspect - the technical - but it deserves to be deepened with an analysis attentive not only to long-term but also to specific characters of the recent rally from the lows of March.
And here I would refer to an article that Brett Steenbarger, one of my favorite analysts, today published on his excellent blog, TraderFeed .
Steenbarger makes extensive use of a set of indicators, such as sectoral performance, the new highs and new lows, the line advance / decline (A / D) and the flows of money, which in technical jargon can be united under the diction of market internals - that is, indicators and "internal" to the market, aimed at illustrating the robustness, the breadth and strength of a trend.
It is, in my opinion, the most useful part of the analysis technique, which for the rest - the use of mass which is made of trendline, support and resistance, or figures variously interpreted - but leaves me quite indifferent.
What they tell us, then, the market internals the recent rally?
The following is the chart published by Steenbarger.
Show how the rise in the prices of the New York Stock Exchange (NYSE, top graph for the last six months) was not matched by an equal recovery of the line A / D (chart below). After
an initial impulse, the rally quickly lost size and strength, becoming more selective . The gains of the indices are in fact attributable to the performance of a few securities, while the "troops" is left behind.
The sectoral analysis confirms this response. Over the past two months the U.S. stock market has halved so the losses of the previous five months, but due to a large extent, a rotation that has benefited some sectors - such as energy, the consumer discretionary and technology - to expense of others - including pharmaceuticals, financial and consumer products.
Same is the verdict of the indicator New High-New Low , which compares the number of titles that are marking new highs and new lows at 52 weeks. In the last month, as market indexes have risen, the New High-New Low remained virtually flat: 797 compared to 747 new highs new lows.
"This is not the condition of a healthy market," notes Steenbarger. "I can not imagine that the market can hold a significant upward movement on a selective basis as well."
His conclusion is convincing. The rally from the lows of March, apparently as lively in going price indexes, è stato in verità asfittico e fragile . Non è di questa pasta che sono fatte le fasi iniziali di un nuovo bull market, che sono invece cariche di energia repressa.
I quattro fattori ricordati da Pring – psicologico, tecnico, economico e monetario – per quanto io riesca a vedere sono tutti, nel complesso, di segno negativo .
La situazione può cambiare. La mia analisi è senz’altro fallibile e incompleta. Ma, al momento, sarei molto sorpreso di vedere il rally continuare ancora per molto. Più probabile, mi pare, è che prima o poi si torni ai minimi di marzo per spingersi, magari, anche oltre .
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