Libya Isn't the Only Force Working Against Stocks

Searching the stars for signs of the futureThis week's violent upheavals in Libya and the resulting spike in crude oil prices not only contributed to a nearly 300-point, two-day swoon for stocks, they also raised fears of further turmoil and market declines. That makes it a good time to look at some basic charts and see what price levels may become important "lines in the sand" for investors in the near future.

As I noted in a DailyFinance column back in late December, various indicators such as interest rates and the Baltic Dry Index were flashing warning signs that the explosive rally the market had been experiencing since September was about to run into some headwinds. There's nothing fancy about the basic risk: Any rally that produces such dizzying gains in such a short span of time (see chart below) is vulnerable to a weakening of the euphoria that powered it.

One market truism -- not a law of nature, just an observation by technicians -- is that markets tend to exit a trend the way they entered it. If prices leaped up in a fast ascent, their fall tends to be just as steep. The same is true of sharp drops -- they are often followed by equally sharp recoveries.

We can see the near-vertical climb since September 2010 in the 10-year chart of the Nasdaq stock market.



Here's another observation that should give investors pause: The market has reversed at right around the same level as the 2007 peak. If the Nasdaq fails to rebound and climb decisively to a new high, this becomes a double-top -- a bearish technical signal that the current rally has topped out and reversed.

This theory on reversals is also valid at bottoms: When a market tests a recent low and holds as it did in late August 2010, forming a double-bottom, that's a good bullish signal.



Moving Average Predicts Serious Weakness


Technical analysis isn't a crystal ball: It provides us with models of what might happen, not predictions.

There are obvious lines of support that should the market keep sliding too far: The band around 2,550, which was the peak reached in April 2010, also offered resistance back in 2008. Now that the Nasdaq has broken out above that level, it provides some strong support. Below that, the 200-week moving average (MA) established long-term support between 2,335 and the 50-week MA of 2,430.

Looking at the one-year chart of the Nasdaq market, we see it's currently clinging precariously to a 50-day moving average of 2,720. Though two previous dips tested the 20-day moving average, this is the first instance since the rally began in September that price has broken below the 50-day MA. That suggests this period of weakness is more severe than previous outbreaks of nervousness.

That zone around 2,550 -- the level at which the market broke out to new highs -- is a major line in the sand. If the Nasdaq breaks down below that, it could be a harbinger of further declines. On the other hand, a sharp rebound back above 2,800 and a retest of previous highs would show the bull was only taking a brief breather.

The Dollar as an Inverse Indicator

As my DailyFinance colleague Joseph Lazzaro recently reported, the U.S. dollar has had some significantly bullish tradewinds filling its sails this year. As this 10-year chart of the DXY (dollar index) shows, this hasn't been positive for the U.S. stock market, as the dollar has been moving inversely to the stock market for most of the past decade.



While stocks steadily rose with only a few hiccups from late 2002 to mid-2008, the dollar declined by some 36%. Then, as panic struck the global financial markets in late 2008, the dollar rebounded strongly and stocks tanked.

While the inverse correlation isn't perfect, it's still significant: When stocks fell hard in May 2010, the dollar popped up. As stocks recovered, the dollar declined.

On this 10-year chart of the dollar, we see a distinctive uptrend since 2008, marked by higher lows. If the inverse correlation of the dollar and stocks holds -- and there is no guarantee it will -- then that slow, grinding rise in the dollar may be signaling a long-term headwind against further stock gains.

In a market that has showered strong gains on bulls, common sense -- and the technical indicators -- suggest that investors would be wise to set stop-loss orders now to protect profits and secure portfolios against further declines.

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Dereck

Major Fraud Alert


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May 29 2011 at 1:07 AM Report abuse rate up rate down Reply
caohellsux1978

The world's largest publicly traded company on Thursday reported net income of $10.65 billion, or $2.14 per share, in the first three months of the year. That compares with $6.3 billion, or 1.33 per share a year ago. Revenue increased 26 percent to $114 billion.

The results surpassed Wall Street estimates of $2.04 per share on sales of $112.6 billion, according to FactSet.

The quarter was Exxon's best since it earned a record $14.83 billion in 2008's third quarter. It comes at a time when some drivers are paying $4 or more for gas and President Obama is threatening the oil industry's multibillion-dollar tax subsidies.

Earnings grew across the company's business segments. Income from its exploration and production business gained 49 percent to $8.7 billion while the company's downstream business, which includes refineries, posted a huge 30-fold jump to more than $1.1 billion.

Anticipating a strong reaction to the results from drivers and politicians, Exxon said on a company blog Wednesday that it has little control over the price of oil, which has risen to near $113 per barrel. The company also noted that less than 3 cents of every dollar it earns comes from the sale of gasoline and diesel fuel.

Now, are you still going to blame the Middle East?

BOYCOTT EXXON/MOBIL NOW THROUGH JULY THE 4TH. BUY YOUR GASOLINE ANYWHERE BUT EXXON/MOBIL, OR ONE OF THEIR MOM AND POP STATIONS. BOYCOTT THEM, AND CUT INTO THEIR PROFITS AND THEY WILL HAVE TO LOWER PRICES.

April 29 2011 at 8:33 AM Report abuse rate up rate down Reply
rossjrmtholly

I find this journalist very interesting; he always has graphs that jump all over the place. They are supposed to make predictions. I wonder was there any thing in his graphs three month ago that predicted the unrest in Egypt and Libya? Perhaps the best advice he can give is to avoid greed! There is no way we can identify future problems and there effects on the stock market.

February 25 2011 at 9:58 AM Report abuse rate up rate down Reply
buzzingstreet

Nice post. Its always better to think before investing money in stock market. Investment should be done in share market but with the aim to increase our funds so speculation should not be the mode of investment. Investors should know why they are investing money in any stock.
Regards

February 25 2011 at 5:21 AM Report abuse rate up rate down Reply
gardeningatnite

I'll catch up with you later, Lee.........hang in there! Gonna go to the grocery store and buy some 'organic treats' for dinner!

February 24 2011 at 7:33 PM Report abuse rate up rate down Reply
LEE Resolution

gardeningatnite
6:39 PM Feb 24, 2011

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Always remember: You who are on the road, Must have a code that you can live by And so become yourself, Because the past is just a good bye......... Teach your children well, Their father's hell did slowly go by, And feed them on your dreams,The one they picked, the one you'll know by.....Don't you ever ask them why, if they told you, you would cry, So just look at them and sigh and know they love you
***************
Paraphrasing an old song from the 60's does you no good. You're a sad case with no appreciation of the very country that gave you your freedom...

February 24 2011 at 6:46 PM Report abuse +2 rate up rate down Reply
2 replies to LEE Resolution's comment
gardeningatnite

I am just here to help pass 'your torch' to the next generation!....I have never and will never disrespect the elderly!...But, the kids need to know that grandpa was a 'good ole boy' and did what he thought was the best and the right thing to do.....times change and the kids need to know WHY! You take the 'good' and 'dismiss' the bad!

February 24 2011 at 6:50 PM Report abuse +1 rate up rate down Reply
gardeningatnite

P.S. I was given my freedom in 1776 and it wasn't because of american imperialism!

February 24 2011 at 6:54 PM Report abuse +1 rate up rate down Reply
LEE Resolution

I only hope that you have no children. You're not much of a role model.

February 24 2011 at 6:33 PM Report abuse rate up rate down Reply
1 reply to LEE Resolution's comment
gardeningatnite

Always remember: You who are on the road, Must have a code that you can live by
And so become yourself, Because the past is just a good bye......... Teach your children well, Their father's hell did slowly go by, And feed them on your dreams,The one they picked, the one you'll know by.....Don't you ever ask them why, if they told you, you would cry, So just look at them and sigh and know they love you.......

February 24 2011 at 6:39 PM Report abuse +1 rate up rate down Reply
LEE Resolution

You're a sad case, kiddo.

February 24 2011 at 6:32 PM Report abuse rate up rate down Reply
1 reply to LEE Resolution's comment
gardeningatnite

Why thank you very much............in this day and age 'sad cases' are the only voices of reason, you know?

February 24 2011 at 6:34 PM Report abuse +1 rate up rate down Reply
LEE Resolution

gardeningatnite

************
Moreover, you have much to thank the Marine Corps for (and I'm certain that you don't realize that fact, nor do you care). I doubt that you give any serious thought to the flag whenever you pass one, but I understand people like you. You have an appreciation for nothing, take everything for granted, and sadly, have no sense of patriotism or responsibility. I feel sorry for you, Bumpkin.

February 24 2011 at 6:28 PM Report abuse +1 rate up rate down Reply
2 replies to LEE Resolution's comment
gardeningatnite

Thank you for protecting my freedom from the Iraqis......at least now, I don't have to speak Iraqian???

February 24 2011 at 6:30 PM Report abuse +1 rate up rate down Reply
gardeningatnite

And, I was doing so good with my 'Korean' and you guys spoiled it!

February 24 2011 at 6:31 PM Report abuse +1 rate up rate down Reply
LEE Resolution

gardeningatnite
6:16 PM Feb 24, 2011


From the Halls of Montezuma, To the shores of Tripoli; We fight those country's battles, In the air, on land, and sea; First to fight for right and freedom, And to keep our honor clean: We are proud to claim the title of the nation of Imerialistic dreams!
*************
You know something, Bumpkin. I'm a former Marine who was wounded and disabled, and yet I was able to make something of my life and retire comfortably, because of what I learned in the Marine Corps. I used to think that you were just scatter brained, but I no longer do. I now think that you are just plain stupid.

February 24 2011 at 6:22 PM Report abuse +2 rate up rate down Reply
2 replies to LEE Resolution's comment
gardeningatnite

Everybody has a story to tell, you know?......The Romans! The British! The Spanish! The French! The Germans! The Japanese! The Russians!........IMPERIALISM!!!

February 24 2011 at 6:29 PM Report abuse -1 rate up rate down Reply
icemanbill23

garden...Despite what you may believe, the world is a much better place because of America. What you liberals call "American Imperialism" is actually America protecting the liberties of the economically or politically oppressed people of the world. I shudder to think of all the coming atrocities that will occur now that America can no longer afford to be the World's policeman.
You may laugh, but Superman is dead and heaven help the World now.

February 24 2011 at 11:32 PM Report abuse rate up rate down Reply