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Yesterday saw the release of the Producer Price Index (PPI), which revealed that wholesale prices rose by 3.2% in November, the largest increase since August 1973. Today, the Consumer Price Index (CPI) shows that consumer prices rose by 0.8% in November, which was larger than expected. This helps explain why the Fed opted for a 0.25% cut earlier this week instead of the desired 0.5%.

The worse than expected inflation picture also lowers the probability of subsequent Fed funds rate cuts, which goes some way to explain today’s 1.3%, 1.4% and 1.2% declines for the Dow, S&P 500 and Nasdaq, respectively.

The excessive pessimism will undoubtedly result in extreme market breadth readings that should produce some buying opportunities next week.

Comments (5)

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1. darex said:
Sunday, 16th Dec 2007 at 5:37 am


Looking at the chart “S&P 500 vs Percentage of S&P 500 Stocks Above 50-Day Moving Average”(as of close of Dec 14th) – it looks to me like this indicator is only marginally below the mean which would suggest to me that we would need a further decline in this indicator before the buying opportunities materialise.

I am wondering does this contradict what you are saying above?

Are you looking at a different indicator? or are you saying that the excessive pessimism will lead to further declines in the breadth indicators early in the week leading to buying opportunities later on in the week,

Thanks for any light you could shed on this

2. Mo Shaarani said:
Sunday, 16th Dec 2007 at 11:23 am

Hi, I was referring to the 5 and 10-day versions of this indicator. Extreme readings on these, have usually resulted in smaller price reversals in the past. Whether you trade these smaller reversals or not is obviously a personal choice.

The 50-day version refers to the bigger reversal, off the November lows. That trend is still pointing up, but it’s in correction mode just now. The uptrend could be damaged if we saw the S&P 500 closing below the 1430 area (this is based on previous behavior around that level). If that happened, we would also have to factor in indicator readings at that time to build a case for the next probable price direction.

3. Aman said:
Sunday, 16th Dec 2007 at 2:36 pm

Hi Darex, I personally also like to correlate the movements in the stocks above 5d, 10d and 50day chart, and the chart which shows stocks above RSI 70. at 7d, 14d, etc level. I find these very helpful in picking short term bottoms which I use to add to long postions as long as I am bullish in the intermediate term in the market.


4. darex said:
Monday, 17th Dec 2007 at 12:48 pm

Thanks guys for the responses,

Mo I see now the indicators that you are talking about. I think the current market is very interesting because there is something of a clash between fundamentals and technical indicators – so it will be interesting to see how the two interact and play out.

Aman – I am more interested in shorting on strength at the moment – I.e. looking for short term highs so would you do something similar in reverse for these trades?. I noticed that Mo said in an in earlier comment that using indicators to find market tops is much harder than finding market bottoms – although prehaps that is a function of being in bull market and if? we are now in a bear market I am speculating that the opposite might hold

5. Aman said:
Monday, 17th Dec 2007 at 6:36 pm

Hi Darex,
Tops are much harder to find with indicators as it is sort of hard to guage the enthusiasm with which the money can keep bidding the markets higher. What I often do to pick tops is a combination of knowing the fundamentals in the markets, watching the internal indicators (as are available on this website) to look for oversold conditions, and finally look for distribution days (multiple days of heavy volume selling as the price actions starts to look ‘toppy’). Now, as is the case distribution days make the market fall so hard, that most of your profits on the long side can get wiped off.
I am short term trader and even when I hold longer term positions (3-4 months) I trade in and out … I use indicators such as the ones on this website to look for the oversold condition to take profit. And then on the next dip or pull back, I get long again, as long as I am bullish on the markets. The problem with indicator is of course that when they signal a pull back, you can just never know the intensity of the pull back. It could be a Feb 27 2007 type of monstrous sell off, or just a relatively flat to negative this is where your regular chart analysis comes in. I try to correspond solid resistance levels, deteriorating fundamentals, or signals of money outflow, and oversold conditions to short.
You might want to also consider correlations between indexes and the action on the VIX as well.
hope some of this helps,

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