John Williams, President of the
Federal Reserve Bank of San Francisco, delivered a risk-friendly speech in
Portland, Oregon on Thursday. From the Wall Street Journal:
"This is a
period when extraordinary vigilance is demanded," Mr. Williams said.
"We stand ready to do what is necessary to attain our goals of maximum
employment and price stability," the central banker said. Should the Fed
need to do more, "the most effective tool would be additional purchases
of longer-maturity securities, including agency mortgage-backed
As the odds increase of getting at
least a QE hint from the Fed in a few weeks, the recent six day sell-off has
featured waning downside momentum and numerous bullish divergences on
60-minute charts. We have discussed divergences between MACD and price many
times in the past. Along with MACD, On Balance Volume (OBV),
and the Accumulation/Distribution indicators have also been flashing "a
rally may be coming" signals on numerous ETF charts. The text below,
describes how OBV can assist investors:
On Balance Volume (OBV) measures
buying and selling pressure as a cumulative indicator that adds volume on up
days and subtracts volume on down days. Chartists can look for divergences
between OBV and price to predict price movements.
Accumulation/Distribution can be used
in a similar manner:
The Accumulation Distribution (Accum/Dist) Line is a
volume-based indicator designed to measure the cumulative flow of money into
and out of a security. Chartists can use this indicator to affirm a
security's underlying trend or anticipate reversals when the indicator
diverges from the security price.
If divergences between price and an
indicator can be used to "anticipate reversals", it may be a good
time to start the anticipation process. Clear bullish divergences between the
three indicators and price can be seen by comparing the slopes of lines A, B,
C, and D on the 60-minute S&P 500 chart below.
The divergences shown here are
shorter-term in nature. They compliment longer-term
bullish developments outlined in a July 8 video.
Since quantitative easing injects
freshly printed dollars into the global financial
system, investors tend to migrate toward inflation-protection assets
before and during a round of QE. The short-term divergences in silver (SLV),
copper (JJC), mining stocks (XME), and oil service companies (OIH) align with
a market that may be preparing for Fed action.
With the situation in Europe
continuing to drag on and on, the markets may get more intervention from the
European Central Bank (ECB). From Reuters:
Bank policymakers held out the possibility on Thursday of taking further
measures to boost the flagging euro zone economy after a cut in their deposit
rate to zero showed no sign of jolting banks into lending out more money.
Faced with fading inflation pressures and no sign banks are about to funnel
more money to business to help the stagnating economy, ECB policymakers
signaled they could act again. "Should the situation deteriorate, there
is no article of faith preventing us from going below 0.75 percent,"
said ECB Governing Council member Klaas Knot.
The EAFE ETF (EFA) has exposure to
France, Germany, and Spain. Thus, it is not surprising EFA has short-term
divergences, keeping a bullish reversal on the table.
France is saying "don't rule out
a rally attempt".
Back in the United States, large-cap
(IWV) and large-cap value stocks (IWD) are also hinting at the possibility of
an imminent rally attempt in risk assets.
If you are expecting a possible rally
in stocks and commodities, it is helpful to see if safe haven assets are
flashing possible reversal signals as well. As shown below, Treasuries (TLT)
and the short S&P 500 ETF (SH) are exhibiting negative or bearish
Many traders do not want to be short
when intervention and press conference risk are so high. Central banks can
change the rules at any time, including Sunday.
As we have stated in the past,
divergences alone are not a reason to buy anything. Divergences are "pay
attention" and "keep an open mind" signals. When they are
present, it is also easier to hold onto your long positions. Divergences can
be removed from a chart based on future price action, but as long as they
remain, the bulls probably have more hope than most believe. Headline-driven
markets can do anything at anytime, including
ignore every divergence presented here. Therefore, it is prudent to
understand where long-term support resides. The chart of the NYSE Composite
Index below could come in handy should the recent bearish trends accelerate.
When signals appear in numerous
markets and across different asset classes, they tend to be more meaningful.
There are too many ETFs with similar set-ups to show them all, but below is a
sampling for your viewing pleasure.