Friday Morning Update, and an Interesting Factoid

As reported by WSJ radio this Friday morning: This week is the first time in history that the Dow Industrials have seen four consecutive 400+ point daily moves. Two up, two down.

As I did my market review last night, the impression I had is that the market is poised for a rally today, but I don’t say that with any conviction. This environment is treacherous and I plan to stay on the sidelines a little longer.

Finally, a note on the technical picture. There has been some commentary, as we should expect, regarding what appears to be an imminent “death cross” (50 day moving average crossing below 200 DMA) on the S&P 500. This has been met with the rebuttal that the death cross just over one year ago not only turned out not to be a bearish signal, but very nearly marked the exact bottom in the index for the move – therefore proving once and for all that technical analysis is utter nonsense.

What the critics do not point out, is that the “death cross” was not confirmed by the MACD, which made a higher low at the same time. The point is that no serious analyst makes portfolio moves based on a single technical indicator. It’s the confirmation and convergence of multiple indicators that give a high probability signal.

(click on chart to enlarge)

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2 thoughts on “Friday Morning Update, and an Interesting Factoid

  1. Hi Harry,

    I am also watching this Death Cross: 50 EMA crossing the 200 EMA.

    And this is a great point you make:

    “What the critics do not point out, is that the “death cross” was not confirmed by the MACD, which made a higher low at the same time. The point is that no serious analyst makes portfolio moves based on a single technical indicator. It’s the confirmation and convergence of multiple indicators that give a high probability signal.”

    Aloha,
    Shirley

  2. Thank you Shirley. Even though my primary approach is fundamental and macro driven, I have found technical signals very useful for the timing of position entry and exit. It continues to amaze me that technical analysis is disparaged at every opportunity. Some of it comes from money management industry people like John Bogle who have an interest in keeping their clients fully invested and long at all times, and some comes from academics like Burton Malkiel who are unable to see beyond the fallacy of their statistics.

    Everyone in the trading business is really in the probability business. Using technical signals helps us to manage risk by trading when the probability of success is high. Along with a sound sell discipline, it is very possible to beat the indexes with “market timing” (the disparaging term for TA). However, as you certainly understand, it’s not easy and takes a great deal of study, just as mastering the playing of a musical instrument or an athletic skill would. There are even simple forms of TA that anyone can use that still beat the indexes. Mebane Faber’s paper on quantitative tactical allocation in the Journal of Wealth Management demonstrates this in a way that even academics can understand.

    Cheers
    Harry

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