Forget Europe. Forget the Economy. And Forget the election. Just Trade.


by Dr Joe Duarte
June 18, 2012

It's Time To Get Technical On This Market.

Give the nature of the global economy at the moment, investors may be thinking about other things. One may be the election. The perception that Mitt Romney is improving his chances of winning may be one of them. If Mr. Romney was to win the U.S. presidential election in November, investors presume that he will be more friendly to business than Mr. Obama.

Another theme that could benefit the blue chip and large cap universe would be more easy money from the Federal Reserve and global central banks. This would argue for owning large cap multinational companies. If there is a synchronized juicing up of the global money printing presses, it would seem logical to expect large multinational companies to benefit from any global economic growth.

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The Dow Jones Industrial Average (INDU) is home to thirty large multinationals. And the index was proof positive that investors want this kind of company in their portfolio. Through all the bad news and fear mongering last week, the blue chip index continued to move higher. Most interesting was the volume spike on Friday, indicating that investors wanted to be prepared for a potentially positive outcome of the Greek election on Sunday.

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Inside the market, things remain mixed, but they could be a lot worse. The Nasdaq Advance Decline line (NAAD) is mirroring the action of the large cap stocks. This is interesting, and positive. When more stocks rise than fall, so do the chances of picking winners. We like this kind of action.

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The Nasdaq High Low Line (NAHL) has been alternating between pointing lower and flattening out for some time. This is a neutral indicator. There are two thing to note. One, flat is better than falling. The other is that this is a lagging indicator. Momentum right now is flat, which means that investors would still have time to react to any major developments.

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Finally, we note that it's difficult to go into a full blown bear market with the utilities making new highs. There are two major points to consider here. The utilities are moving higher because they deliver nice yields in a world where bonds are not. Second, utilities are often bellwethers of improved economic activity as rising prices in the sector often forecast increased power demand, the hallmark of a recovering economy.

The yield argument seems to be holding more water at this point than the recovering economy. Yet, it's difficult to argue with the notion that the utilities are clearly trying to tell the market something.

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The market is close to making a decision. This is a good time to be paying more attention to the charts than to the news. The charts will filter the news and the market will move. Be ready to move.

Keep your cash ready to deploy and remain patient. Going short or long is not as important as the sustainability of the move. If we're right, the move will be fairly good and will be in place for some time giving trend following investors an opportunity to make money.

Trading Plan Review

The market seems ready to make a move. Investors who use technical analysis will have the advantage once things get moving in the direction chosen by the majority, up or down. There is no reason to make any kind of large commitment to either the long or short side at this point. This is one of those times when we have to wait and see what happens. But it does feel as if things are getting closer to breaking one way or another.

Investors who follow our trading models should be holding large amounts of cash at this point but have put some money to work lately on the long side.

Our energy portfolio is in cash. Our health care portfolio is long.

We are in cash in gold market. We are short U.S. Treasury bonds.

Stock of The Day

SPDR Financial Services ETF (NYSE: XLF) Made It Back To 50-day Moving Average

by Dr Joe Duarte

Shares of the SPDR Financial Services ETF (NYSE: XLF) put this market in perspective, as it teased investors last week by closing Friday just below its 50-day moving average.

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Dutiful technical traders might not have bought shares of XLF on Friday as the ETF just missed on delivering an intermediate term buy signal by closing just below its 50-day moving average.

That means that those looking to time this ETF will have to wait until the market decides what it wants to do about Greece. And that's anybody's guess. The good thing is that if the market falls, those who didn't anticipate a move above the 50-day line will be spared losses. Otherwise, if the market rallies in a big way for several weeks, waiting was worth the few bucks one might miss for not anticipating a move.

This is a market where absolute discipline is called for. If you anticipate something, you could get hurt in a hurry. The situation in Greece and in Europe is nowhere near being resolved. That doesn't mean that the market will crash. But it doesn't mean that a 20% rally to the up side is in the cards either.

Discipline is very important here and XLF and the interplay with its 50-day moving average will be an important set of developments. Watch it carefully.

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