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With a Fed statement coming
Wednesday, many believe the bulls need a formal announcement of QE3, which
may not be the case. The odds are extremely low the Fed does not deliver at
least some market-friendly language in their July/August statement. They do
not need to announce QE3, they just need to hint at
it. QE2 was hinted at in late August 2010, but not formally announced until
early November. In 2010, the markets did not wait for the formal announcement
(see chart below). As shown via the numerous weekly bullish signals in the
remainder of this article, the markets may be following the bullish script
from late summer 2010.
 
On July
30, we showed bullish signals from two easy to use indicators, RSI and
moving averages. Today, we show bullish "crossovers" on the weekly
charts of numerous markets using an indicator known as MACD.
Since it can give some powerful
signals relative to a change in trend, MACD is one of the most widely used
indicators by traders and money managers. MACD stands for Moving Average
Convergence Divergence, which sounds intimidating. In the real world, MACD is
very easy to use.
A bullish MACD cross occurs when the
black MACD line moves above the red line. According to Dr. Alexander Elder in
Trading For A Living:
MACD crossovers
identify shifts in the balance of power between the bulls and the bears. When
the black MACD line rises above the red MACD line, it shows that the bulls
dominate the market, and it is better to trade from the long side. When the
black line moves above the red line, it gives a buy signal (see
green arrow below).
The S&P 500 Index (below), like
the Dow above, has an encouraging look to its weekly MACD. The MACD Histogram
is also telling us to be open to bullish outcomes since it is rising (see
blue bars).
Central bankers want to avoid
deflation and create positive asset inflation to assist impaired global
balance sheets. The recent signs of life in gold (GLD) also support the
bullish case.
In Short Takes, we often point out
that weekly signals are more meaningful than daily signals. Therefore, a
weekly MACD cross is something we want to be aware of and account for in our
portfolio allocations.
Some of the charts shown here have
"locked-in" a MACD bullish cross by closing last week with the
signal in place. Some of the markets have not yet seen a weekly close with a
bullish signal from MACD. If the signal carries into the end of a week, it is
more important.
Since all indicators can be
"whipsawed" or give false signals, it is important to have a
"what happens if I am wrong" strategy in place.
You do not need to be an anchor at
CNBC to know Europe has some financial problems. Notice how clear the bullish
MACD cross is on the weekly chart of the Euro Stoxx
50 Index below.
If central bankers print more money,
it may take some of the short-term pressure off Germany to write additional
bailout checks. The weekly chart of the German DAX below is a welcome sign
for all risk assets.
Emerging markets have been laggards
for quite some time. When the laggards begin to perk up, it can be a sign a
rally is in the cards.
Economic growth in China has slowed
noticeably in recent months. Chinese stocks have been significant laggards
since late 2010. The FXI ETF below is trying to complete a bullish MACD
cross. When laggards show some strength their "bounce back" rallies
can often be significant.
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