This is the first in what I’m hoping will become a regular feature on my blog. The aim of this post is to try and link the economic, fundamental and technical theories with trading and investing in the real world.
Why have I called it ‘Useful Share Market Tips’? Well, because I believe success lies in learning and understanding. Trading and investing for beginners usually starts with the search for the ‘latest hot tip’.
There is certainly an abundance of ‘hot tips’ actively marketed in both the traditional and online forms of media. Typically, this sort of information does nothing for the long term growth of the trader or investor.
‘Useful Share Market Tips’ is purely a general discussion about fundamental and technical issues facing some of the leading markets and economies. It aims to promote genuine discussion. It is not designed to provide advice. It is solely for educational purposes.
It is basically a record of the processes I follow when I sit down to assess the market from a short and medium term perspective. It is my assessment process which I use to evaluate the ‘overall picture’. Once I have this ‘picture’ I will then start to drill down deeper into the market to look for individual stocks.
This post looks at the………
U.S Economy & Markets Fundamentals
The first quarter GDP result was slightly weaker than most economists’ expectations with GDP expanding at an annual rate of 3.2 percent in the first quarter. The lead driver was an increase in consumer spending. Business inventories also increased as businesses restocked to meet firming demand. This is the first increase in inventories since the first quarter of 2008.
Whilst it is welcoming to see consecutive positive numbers, it is clear the recovery phase still faces major challenges given the significant slow-down in growth for the last quarter compared with the pace set in the fourth quarter of 2009 (GDP grew at 5.6 percent).
Despite the recovery in growth, the unemployment rate continues to remain stubbornly high at 9.7%. The unemployment rate has basically remained static since mid 2009. And whilst this is not surprising (employment is a ‘lagging indicator’) it is concerning that the recovery has not generated any real signs of improvement in employment.
In March payrolls rose by 162,000 which by itself is encouraging. However, a closer inspection reveals close to 1/3 of the jobs created were temporary workers hired by the government to help with the 2010 census.
Payrolls are expected to continue to show solid numbers through to August with the government estimated to hire another 250,000 – 500,000 more temporary staff for the census. If employment fails to show signs of sustained recovery outside of the governments efforts, questions marks will continue to remain over the sustainability of the recovery in the U.S.
The stock market has already priced in much of the anticipated recovery in the U.S economy. The stock market now faces both global and domestic pressures. Global uncertainty surrounds the sovereign debt issues in Europe and the longer these issues remain unresolved the more unsettling it is for world markets.
On the domestic front, the U.S stock market is facing growing pressure from the SEC action against Goldman Sachs. The whole situation could get worse if reports are true that Goldman’s and its employees may also be facing a criminal probe on top of the SEC action.
Goldman Sachs is under attack from all angles with talk of a renewed push by congressmen to curb the banks propriety trading activities. This has put added pressure on the banks in general and has lead to analyst downgrades and a selloff in the financial sector.
The Technical Picture – Dow Jones
Since mid-April the Dow Jones has been taking a breather after a sharp run up from early February. Interestingly, day-to-day volatility has also re-entered the market since mid-April with daily ranges of 133, 156, 168 points on a number of ‘up days’ and daily ranges of 179, 230 and 280 points ranges on recent down days.
This sort of daily range volatility was evident in early 2007 and continued through to the top in late 2007. It was one of the final signs of what I believed was a fast approaching end to the bull market and it lead me to start reducing my exposure to the market in mid 2007.
This type of market volatility is what I like to refer to as a stock market early warning system. It doesn’t signal that the end is imminent, but it is quite often an advance sign of an approaching market top.
Despite the temporary pause, the overall trend is still to the up side and therefore most positions should be to the long side. However, caution is necessary.
The Dow is currently in what I believe is the fifth wave of an Elliot Wave Impulsive move. Based on this I have calculated a market top target in the range of 12,250 – 12,295. This is approximately 10% higher than where the Dow currently sits.
In the short-term the Dow faces resistance between 11,235 and 11350, with 11,235 representing the 61.8% Fibonacci retracement level and 11350 a long term resistance area that has been tested a number of times since 1999.
S&P 500
The broader S&P has also been moving in a sideway move since early April. Like the Dow, the S&P is also in the fifth wave of an Elliot Wave Impulsive move. I have an S&P market top target in the range of 1308 – 1383 which is around 9% higher than where the market currently sits.
And just like the Dow, the S&P index also faces some resistance in the short term between 1228 and 1250, with 1228 representing the 61.8% Fibonacci level and 1250 being a long term support and resistance level with roots as far back as 1998.
NASDAQ
The NASDAQ has been the strongest of the three major indices with the index gaining a whopping 75% since March 2009. Like the Dow and S&P, the NASDAQ is also in the fifth wave. I have a projected NASDAQ market top target in the range of 2705 – 2770 which is approximately 8.5% higher than where the index is presently placed.
In summary, the trend for all three indexes remains to the up side and whilst this is the case, long positions continue to be the preferred option.
However, the Dow Jones and the broader S&P 500 both face considerable resistance at their present levels. Both indexes are close to important resistance zones. The increasing daily volatility is also a concern.
Added to the picture is the growing uncertainty within the global economic environment and the less than inspiring U.S recovery. Given all of this, I think now is more a time for closely monitoring current positions rather than entering any significant number of new positions.
If the market can overcome the European debt concerns and civil and criminal probes into the financial sector, the market will be able to move higher and closer to my forecast top.
One thing is for certain, there is currently a very neat symmetry to the projected target top for all three indices. Each is around 10% off their projected top – but as always, only time will tell.
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