About Andrew Thrasher

Andrew Thrasher is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

You Can Hate the Rally But Still Must Respect the Fed

I don’t have to tell you what happened yesterday, at least I hope I don’t need to. The market got what it wanted and it seems things are setup for another crack-induced move with Bernanke as the drug dealer.

I stand conflicted as a technical analyst. I say that because I see glimpses of the market being overextended here but it just feels like traders want to keep buying. Hedge funds have seen lackluster performance over the past two and half a years and have made it known they have no problem taking on beta to prevent redemption’s and saving face with their partners.

While I won’t say we are going to see a mirror image of 2010 and 2011 when Bernanke lit the torch to begin the Olympic games of ‘risk on’ trading, it’s tough to make a strong argument against it. I’m sure many money managers sit at their terminals this morning closing their eyes as they hit ‘buy’, acting on hope and a little instinct rather than a tested investment plan.

Going forward I would not be surprised to see some kind of pullback which traders will likely take advantage of to deploy more cash. My biggest worry is when things appear this easy something seems to always happen to pull the rug out from as many people as possible. If you start hearing your cab driver, caddy, or waitress mention quantitative easing and the stock market, get worried.

You can hate any future rally we may see in equities but you should still respect it. Bernanke just passed out more free samples while Mr. Market enjoys the high.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Signs of Relief in Utilities

We had last looked at a chart of utilities via the Utilities Select Sector ETF (XLU) on July 17th when momentum was diverging from price as was the trend as measured by the ADX line. Price didn’t react immediately to these divergences but eventually momentum won out knocking XLU down to where it sits today, $36.28.

Well we again are seeing a very slight divergence in momentum as we see in the top panel of the chart. I also noticed a larger divergence in the Money Flow Index, which is a volume-based momentum indicator. It is encouraging to see MFI bounce back from being oversold (below 20) and continue to advance up to 39 against the price action during the same time period. This may sound familiar, because we had the same discussion with RSI and On Balance Volume yesterday with EEM.

Next we see price is finding support near the 50% retracement level created between the April ’12 low and July ’12 high. We can also see slight resistance at the 38.2% retracement level that price knocked into last week.

Just like when observing the negative divergences back in July, we can’t assume price will immediate flip and start heading in the same direction as price and volume momentum. But it is these clues that we can begin to look for possible signs of a reversal.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

Emerging Market at Resistance

Today I want to take a look at the emerging market ETF (EEM). We have seen a rally in EEM alongside most equities, both local and international. Emerging markets have also gotten a boost by some of the positive news out of Europe, which has shown that high tide raises all boats. However, now EEM is up against resistance at $40.60, which it came in contact with back in mid-August. This area was once support for the emerging market ETF back in April before breaking down, as you can see in the chart below.

As we approach the recent short-term high, we must take a look at the ‘health’ of the advance. Turning to our trusty RSI indicator, we see a very slight divergence from price, with the indicator not quite getting to its previous high, although it did get close.

Next up is volume, I’ve put On Balance Volume at the bottom panel of the chart, which simply adds the number of shares traded on positive days and subtracts them on negative days. We can use this indicator to monitor volume flow. I’m seeing a larger negative divergence in volume based on OBV compared to what we are seeing in RSI.

It’s important to recognize the other forces at work here, with the Fed potentially priming the pump for another round of QE, which we’ll find out tomorrow; as well as the increase willingness for more bailouts in Europe. Now these types of events aren’t directly related to the countries that make up EEM, but the ‘risk on’ nature these bailouts and easing induces can make traders throw the negative divergences and resistance out the window and pile into the ETF while trying to increase their allocation to international equities.

I believe much can be found in technical analysis and there may be some downside risk for EEM, but we can’t take our eye of other factors that can have a large impact on the price action of any security, including EEM.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.