Tuesday 21 February 2012

Are we there yet?

We had lots of comments from the readers regarding the debt ceiling and thereafter. It seems that it will be one of those "buy the rumour, sell the news" type of things. Nobody believes that Greece has been saved and everyone is just buying time. I do not think the other EZ countries will pay even one cent. The editorial in "The Guardian," UK, says it all: http://www.guardian.co.uk/commentisfree/2012/feb/21/eurozone-greece-deal-debt-editorial

If anyone was hoping for a run-off rally after Europe had been fixed, they were surely disappointed. Question now is, are we done with this rally? Let us be very clear about the rally. This is not a fundamental driven rally. This is all about liquidity pumped by ECB and the FED in the form of LTRO. The 2nd phase of LTRO does not start till the end of February and the FED will be selling lots of bonds here in USA. This will drain out some of the excess liquidity and may cause the expected pull back in the stock markets.

In terms of market internals, breadth is becoming weak. Various summation indexes measure the market indexes and all things being equal, when the summation indexes turn down, that increases the odds of market correction. Let us look at NYSI first:
Parabolic Sar is giving a sell signal as well.

Let us look at BPSPX or SP 500 bullish percentage index, which is another breadth indicator.
As you can see on the weekly chart, it is as high as you can imagine and way over bought. Normally there is not much scope of further advance in prices from this level and more often than not, this level signify correction.

Of course there are many divergences and in the normal course of things we would have a correction long time back. But this is not a normal market.

However, we have to wait for the change of trend and my simple measure of change of trend is the AD line. Till AD line does not convincingly break through the 13 DMA, I would not consider it a valid trend change.
I would be very worried to front run even with all technical indicators screaming trend change because external forces like the FED or ECB can and do distort the market big time.

For the sake of information, you might be interested in the latest from Tom Demark:

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  1. The trend is your friend. I'll stay long until that changes. My gut is telling me it could happen tomorrow.

  2. You can make the argument that all rallies are liquidity rallies, not that rallies can't be both fundamental and liquidity based, but strong steady rallies are impossible without the easy money underneath it.

  3. AUD\USD finally breaks parallel channel