Thursday Update
Still Feeling Uneasy...
November 10, 2005
by David Yu
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Note:
Friday, 11/11/2005 Here's a very interesting
VIX chart
from one of my regular readers. Thanks to David L. for sending me this
chart.
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| Due to the recent Dollar rally that started in the beginning of September, I don't think today's International Trade report came as much of a surprise. The U.S. trade deficit in September grew by 11.4% over August, to -$66.1 billion, which is higher than the -$61.3 billion expected by the market and -$60 billion forecasted by Briefing.com. | |
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Exports were down 7.6% and imports were up 2.4%. The appreciating Dollar made it cheaper for us to buy imports but more expensive to sell our goods and services in the global marketplace. Rising Dollar's part of the reason for the declining crude oil price despite recent increase in imports. Chart 1 shows, as of last week, the crude oil imports have returned to over 10 million barrels per day, the pre-Hurricane Katrina level. |
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In any regard, the market had already fully discounted all that and moved on way before the release of the September international trade report. It would've been a big surprise had the trade deficit been reduced; the divergence of the rising Dollar and the shrinking trade deficit would've meant real trouble for the economy. For now, as crazy as this sounds, the convergence of the rising Dollar and the rising imports has managed to keep the show going despite all the technical divergences.
One example of the blatant technical divergences can be traced on the Dow Jones Industrial Average chart. This 15-minute 10-day intraday chart (Chart 2) shows the Dow's recent rally from the Oct. 28 short-term bottom. Please note how much the Dow has gained over the last 10 trading sessions while both the RSI and the MACD have been forming lower highs. I'm sure this market has befuddled quite a few traders and fund managers.
Chart 2
As I've mentioned last week, other than buying some Diamonds (DIA) and QQQQs (and of course SSRI) just to take advantage of this rally, I've chosen not to participate fully in this treacherous market. A "day" trader doesn't mean he or she has to trade everyday. It just feels right keeping mostly cash and waiting for this to blow over. These technical divergences will have to be resolved sooner or later. The market may just be strong enough to force these technical indicators to reverse their directions, but I really doubt it. Whether it does or not, there's no need to throw my cash into the blender for the time being.
There's still no sell signal yet since my Market Strength MACD gave the buy signal on Oct. 25 (blue bar on the right). Nevertheless, the histogram almost dropped below the black trigger line today. Interestingly, the DJI Average was up only 6.49 points yesterday, but my Market Strength histogram expanded by almost a third from the day before. Today, the DJI almost had a triple-digit gain, but the histogram contracted. Very interesting indeed...
Anyway, as much as I dislike the zigzag formation of the recent histogram pattern, I'll have to respect what the Market Strength indicator is telling me. And, as long as this histogram stays in the positive territory, I'll be playing along for as long as it lasts.
Chart 3
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