Market Indicators (as of Sept. 30)

Each weekend, I will list signals from some of the most useful market indicators.*

A full list of the major indicators with signals can be found in my book, All About Market Indicators(McGraw-Hill).) I’m also the author of the best-selling Understanding Options (McGraw-Hill), Understanding Stocks (McGraw-Hill), and Start Day Trading Now (Adams Media).

 

AAII survey (9/25/2013)

36.1% Bullish. 30.6% Bearish.

Sell signal: Over 60% bullish.

Buy signal: Over 50% bearish.

 

Investor’s Intelligence (9/25/2013)

44.3 % Bullish. 20.6% Bearish.

Sell signal: Over 50% bullish.

Buy signal: Over 50% bearish.

 

CBOE Equity Put/Call Ratio: .70

Sell Signal: Less than or near .50 is a sell (more call options are being bought).

Buy signal: Higher than or near 1.0 is a buy (more put options are being bought)

 

VIX: 15.46

Sell signal: Lower than 12.

Buy signal: Over 40.

 

Moving Averages (daily): S&P 500 pointing sharply down just above its 50-day moving average. 

Sell signal: Index crosses below 50-, 100-, or 200-day MA.

Buy signal: Index crosses over 50-day, 100-day, and 200-day MA.

Danger: Index about to cross below its 20-day and 50-day moving average.

 

MACD: MACD is above the zero line and above the red 9-day signal line, but moving sideways. (Note: I’m using the settings, 19,39,9, recommended by Gerald Appel, MACD’s creator.)

Sell signal: MACD line crosses below 9-day (red or gray) signal line. MACD line (black line) crosses below zero line.

Buy Signal:  MACD line crosses above 9-day signal line. MACD line crosses above zero line.

 

Analysis: Sentiment was mixed last week, but that should change this week. Moving averages are reflecting last week’s bearish mood, and are pointing straight down. The odds are good that the S&P will fall below its moving averages this week, a bearish sign. In addition, expect reversals. Put another way, this is a trader’s market. Side note: Volume was surprisingly low last week. Judging by the opening, the big money is placing their bets on the downside, but that could change quickly.

Opinion: By now, you know that the D.C. sideshow has moved center stage. The chances are good there will be a government shutdown, but no one knows how long it will last. Nevertheless, there should be major fireworks, that is, unless Congress reaches an agreement on Monday night. If there is a rally into the close on Monday, perhaps a deal is in the works. If the market sinks faster and further, watch out below.

(If you’re shorting this market, be careful: Market could strongly reverse direction on Tuesday if shutdown is averted.)

If this stalemate drags on for more than a few days, the market will take a hit. And as soon as it’s finally resolved, the market should rally. The problem is that we’re in unknown territory, so the market could go lower than anyone anticipated, and perhaps climb higher when it’s over. Either way, it will not be pretty.

In addition to this sideshow, the jobs numbers are released on Friday. That could also be a market-moving event. And if the market starts to unravel, perhaps Bernanke will announce that happy days are here again and there will be no tapering for the rest of the year. And if those job numbers disappoint, QE will go on.

All of this uncertainty is going to create volatility. I warned you last week it is a dangerous market, and it is. Risk adverse investors should already be on the sidelines. If you’re fully invested, this is one of those times when you grit your teeth and hope that everything will be all right, as Bob Marley might say. It should be a fascinating week, and also frustrating if you’re an investor.

For the moment, bond prices have rallied (thanks, Ben!), surprising almost everyone. But keep your eye on the 10-year Treasury for any unusual movements (if the yield goes up, bond prices go down). While everyone is distracted by Washington, look for market moving events that can alter the market. Sometimes there are clues what might happen next (such as selloffs or rallies during the last hour).

Bottom line: If you’re a rookie, watch and learn, hopefully from the sidelines. There are a number of conflicting events that will increase volatility. If the market comes out of this on Friday unscathed, I would be surprised. But never forget that anything is possible. A worst-case scenario for the week is 1500 on the S&P 500. Best case is we end where we started at or near 1700. Put on your seatbelts now because the market is going to take us for a bumpy ride (thanks to Congress).

* Note: These signals are not actionable trades, but only guidelines. Always use other indicators, and your own research, to confirm before buying or selling.

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