The following is a brief excerpt and 2 of 6 charts from our October 1st report entitled Our Checklist For A Sustainable Market Advance. This is one of 4 reports that we produced for clients this week pertaining to the US stock market, market sectors, US interest rates, the US Dollar, and commodities.
The Good News: Germany, Japan Are Holding Support
In Tuesday’s report, entitled Breakdown In Japan Warns Of More Weakness In The US (access requires subscription), we warned that the September 29th breakdown through major support at 17,420 in the Japanese Nikkei 225 Index, which represents its 2012 uptrend, warned of upcoming weakness in the positively correlated S&P 500 (SPX). However, Chart 1 below shows that the index rebounded to recapture its trend line in today’s session which, per the correlation, is indirectly positive for the US market.
The question is: can the Nikkei 225 remain above this support? Another break down below 17,420 would be construed as a failed attempt to resume its 3-year uptrend, and would portend more weakness in Japan, and in the US, in the weeks ahead.
Chart 2 below shows that, unlike Japan, the German DAX has successfully tested and held its own major support level, a four year uptrend line, over the past week. The DAX is also positively correlated to the S&P 500.
Per the correlation, as long as this support at 9375 continues to hold, it will be construed as being indirectly positive for the US broad market.
The Bad News: A Look Under The US Market’s “Hood”
continued…
With high frequency trading/algorithmic trading now dominating much of the intraday price movement in the major US indexes, it’s become increasing necessary to look at more than the price of an asset to help determine what is really going on in the market. Today is a great example: a much worse than expected September jobs report is released, the S&P 500 almost immediately drops 30 points or 1.6%, only to rally by 40 points and turn positive by 10 points on the day 2 hours later. What changed economically? Nothing.
However, there are ways to measure the sustainability of a price move, whether it’s up or down, by looking at non price-related data — which we have been relying on more and more recently to try to look past these wild and confusing intraday market swings.
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